HW 4/ Week 4/ CH 4

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1. A firm wants to strengthen its financial position. Which of the following
actions would INCREASE its current ratio?
A) Reduce the company's days' sales outstanding to the industry average
and use the resulting cash savings to purchase plant and equipment.
D) Issue new stock, then use some of the proceeds
to purchase additional inventory and hold the
remainder as cash.

B) Use cash to repurchase some of the company's own stock.

C) Borrow using short-term debt and use the proceeds to repay debt that
has a maturity of more than one year.

D) Issue new stock, then use some of the proceeds to purchase additional
inventory and hold the remainder as cash.

E) Use cash to increase inventory holdings.

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

A) Company E probably has fewer growth opportunities.

B) Company E is probably judged by investors to be riskier.

C) Company E must have a higher market-to-book ratio.

D) Company E must pay a lower dividend.

E) Company E trades at a higher P/E ratio.

3. Amram Company's current ratio is 2.0. Considered alone, which of the B) Borrow using short-term notes payable and use
following actions would LOWER the current ratio? the proceeds to reduce long-term debt.

A) Borrow using short-term notes payable and use the proceeds to reduce
accruals.

B) Borrow using short-term notes payable and use the proceeds to reduce
long-term debt.

C) Use cash to reduce accruals.

D) Use cash to reduce short-term notes payable.

E) Use cash to reduce accounts payable.

4. Which of the following statements is CORRECT?
A) A decline in a firm's inventory turnover ratio suggests that it is improving
both its inventory management and its liquidity position, i.e., that it is becoming
more liquid.
E) The days sales outstanding ratio tells us how
long it takes, on average, to collect after a sale is
made. The DSO can be compared with the firm's
credit terms to get an idea of whether customers
are paying on time.

B) In general, it's better to have a low inventory turnover ratio than a high one,
as a low one indicates that the firm has an adequate stock of inventory relative
to sales and thus will not lose sales as a result of running out of stock.

C) If a firm's fixed assets turnover ratio is significantly lower than its industry
average, this could indicate that it uses its fixed assets very efficiently or is
operating at over capacity and should probably add fixed assets.

D) The more conservative a firm's management is, the higher its debt ratio is
likely to be.

E) The days sales outstanding ratio tells us how long it takes, on average, to
collect after a sale is made. The DSO can be compared with the firm's credit
terms to get an idea of whether customers are paying on time.
5. Beranek Corp has $665,000 of assets, and it uses no debt--it is financed only B) $266,000
with common equity. The new CFO wants to employ enough debt to raise the
debt/assets ratio to 40%, using the proceeds from borrowing to buy back Total assets $665,000
common stock at its book value. How much must the firm borrow to achieve Target debt ratio 40%
the target debt ratio? Debt to achieve target ratio = Amount borrowed =
Target% * Assets = $266,000
A) $303,240

B) $266,000

C) $324,520

D) $250,040

E) $252,700
6. Meyer Inc's assets are $745,000, and its total debt outstanding is $185,000. The B) $224,750
new CFO wants to establish a debt/assets ratio of 55%. The size of the firm
does not change. How much debt must the company add or subtract to Total assets $745,000
achieve the target debt ratio? Old debt $185,000
Target debt ratio 55%
A) $168,563 Target amount of debt = Target debt% *
Total asset $409,750
B) $224,750
Change in amount of debt outstanding = Target
C) $191,038 debt -
Old debt = $224,750
D) $211,265

E) $271,948
7. Helmuth Inc's latest net income was $1,210,000, and it had 225,000 shares outstanding. The company wants to pay E) $2.42
out 45% of its income. What dividend per share should it declare?
Net income
A) $2.49 $1,210,000
Shares
B) $2.06 outstanding
225,000
C) $2.11 Payout ratio
45%
D) $2.69 EPS = NI /
shares
E) $2.42 outstanding =
$5.38
DPS = EPS
Payout% =
$2.42
8. Wie Corp's sales last year were $365,000, and its year-end total assets were $355,000. The average firm in the A) $202,917
industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that
can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the Sales
assets be reduced to bring the TATO to the industry average, holding sales constant? $365,000
Actual total
A) $202,917 assets
$355,000
B) $221,179 Target TATO
= Sales /
C) $213,063 Total assets =
2.40
D) $160,304 Target assets
= Sales /
E) $184,654 Target TATO
= $152,083
Asset
reduction =
Actual assets
- Target
assets =
$202,917
9. Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were C) 23.38%
$250,000. The firm's total-debt-to-total-assets ratio was 67.5%. Based on the DuPont equation, what was the ROE?
Sales
A) 21.98% $325,000
Assets
B) 18.94% $250,000
Net income
C) 23.38% $19,000
Debt ratio
D) 22.68% 67.5%
Debt = Debt%
E) 22.22% Assets =
$168,750
Equity = Assets
- Debt =
$81,250
Profit margin =
NI / Sales =
5.85%
TATO 1.30
Equity
multiplier =
Assets / Equity
= 3.08

ROE = 23.38%
10. Studies document that stocks of companies that have had historically high rates of return on equity and asset B) False
growth ("excellent companies") perform relatively better than those that have had relatively low rates of return
on equity and asset growth ("unexcellent companies").
A) True

B) False