Exam 3: Financial Analysis

new firm is developing its business plan.It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

year Rosenberg Corp.had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%.Now suppose the new CFO convinces the president to increase the debt ratio to 48%.Sales and total assets will not be affected, but interest expenses would increase.However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?

year Urbana Corp.had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.Assets, sales, and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?

Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price.Which of the following statements is CORRECT?

is the firm's market-to-book ratio?

is the firm's current ratio?

current ratio and inventory turnover ratios both help us measure the firm's liquidity.The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

current and quick ratios always indicate that a firm is managing its liquidity position well.

firm wants to strengthen its financial position.Which of the following actions would increase its quick ratio?

year Altman Corp.had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500.Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?

firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?

Companies HD and LD have the same tax rate, sales, 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?

basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000.What was its ROE?

is the firm's ROA?

Companies HD and LD are both profitable, and they have the same total assets However, Company HD has the higher debt ratio.Which of the following statements is CORRECT?

Considered alone, which of the following would increase a company's current ratio?