Exam 7: Analysis of Financial Statements

Last 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?

The times-interest-earned ratio is one,but not the only,indication of a firm's ability to meet its long-term and short-term debt obligations.

A 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-to-assets 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.)

Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA),Sales (S),return on assets (ROA),and profit margin (PM).However,Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?