Exam 10: Credit Analysis

Which of the following is likely to be used to measure a company's solvency?

Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed, and Company B is 50% debt financed and 50% equity financed. If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is _____ and a ROE that is _____ than Company B's. A) lower higher B) higher higher C) lower lower D) higher lower

The higher the cash to current liabilities ratio of a company, the better is the company.

An increase in the credit days offered to customers by a company will improve the company's financial situation because of the likely increase in sales.

An increase in the current ratio due to increased inventory and receivables could be consistent with a recession in the economy.

Below is information for year ended 12/31/05 for Company A and Company B. Company A Company B Interest expense \ 400 \ Tax expense (40\%) 400 400 Net income 600 600 Total assets -12/31/05 10,000 10,000 Total debt 5,000 0 Equity 5,000 10,000 -Company A capitalized $100 in interest costs, the pension obligation, during the year. Times interest earned ratio, after necessary adjustments, for Company A is:

Sellograph Corporation reports sales of $10 million for Year 2, with a gross profit margin of 40%. 20% of Sellograph's sales are on credit. Year 1 Year 2 Accounts receivable \ 150,000 \ 170,000 Inventory 900,000 1,000,000 Accounts payable 1,100,000 1,200,000 -Accounts payable days outstanding at the end of Year 2 is closest to:

An analyst should treat preferred stock on a firm's balance sheet as debt when calculating leverage ratios if the preferred stock is:

Which of the following is not a measure of a company's solvency?

If a company switches from FIFO to LIFO during a period of rising prices, inventory turnover will probably increase.

Refer to the financial statements for Wal-Mart, below a. Calculate for X7 the ratios listed below. X6 numbers are provided for comparative purposes. X6 X7 Inventory turnover 4.96 Days' inventory outstanding 77.20 Accounts receivable turnover 120.58 Days' receivable outstanding 3.28 Payables turnover 12.39 Days' payables outstanding 31.10 Length of operating cycle 80.48 Length of cash cycle 49.37 Current ratio 1.51 Quick ratio 0.12 b. Working capital management is an important consideration for many companies. Which component of Wal-Mart's working capital do you think it spends most time managing? That is, which component is likely to be the most important? Why? What has happened to this component from X6 to X7? Note: Use ending inventory, ending accounts receivable, and ending accounts payable in the calculation of days' inventory outstanding, days' receivable outstanding, and days' payables outstanding respectively. Use average inventory, average accounts receivable, and average accounts payable in the calculation of inventory turnover, accounts receivable turnover, and payables turnover respectively.

The use of LIFO will inflate the current ratio under normal economic conditions.

The ratio of "near-cash" assets to the total of current assets is one measure of the degree of current asset liquidity.

Which of the following would be least likely to affect the quality of receivables?

Which of the following is not a primary motivation for a company financing its business activities through debt?

An increase in the current ratio over time is always a good indication of increased liquidity of a firm.

When examining a company's current ratio, it is important to also assess the quality of the current assets and liabilities.

The higher a company's inventory turnover, the better is the company.

The SEC requires disclosure of the ratio of combined fixed charges and preferred dividends in the prospectus of all preferred stock offerings.

All other things being equal, if a company issues a 1% stock dividend, what is the effect on the following ratios? Increase Times interest earned Financial leverage ratio A) Increase Increase Increase B) Increase No effect Increase C) No effect No effect No effect D) No effect No effect