Exam 3: Financial Analysis

investor is considering starting a new business.The company would require $475,000 of assets, and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

problem with ratio analysis is that relationships can be manipulated.For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

is the firm's total assets turnover?

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

is the firm's inventory turnover ratio?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power.Both companies have positive net incomes.Company HD has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

is the firm's dividends per share?

Corp.'s assets are $625,000, and its total debt outstanding is $185,000.The new CFO wants to employ a debt ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

LeCompte Corp.has $312,900 of assets, and it uses only common equity capital Its sales for the last year were $620,000, and its net income after taxes was $24,655.Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%.What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

Which of the following statements is CORRECT?

is the firm's P/E ratio?

Muscarella Inc.has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income.Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

Helmuth Inc.'s latest net income was $1,250,000, and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare?

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.What was its total assets turnover ratio (TATO)?

Amram Company's current ratio is 1.9.Considered alone, which of the following actions would reduce the company's current ratio?

is the firm's ROE?

is the firm's TIE?