Question Details

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



1.	You observe that a firm- 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?
a.	Its total assets turnover must be above the industry average.
b.	Its return on assets must equal the industry average.
c.	Its TIE ratio must be below the industry average.
d.	Its total assets turnover must be below the industry average.
e.	Its total assets turnover must equal the industry average.
	
2.	Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt.  The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate.  Which of the following is likely to occur if the company goes ahead with the stock issue?
a.	The ROA will decline.
b.	Taxable income will decline.
c.	The tax bill will increase.
d.	Net income will decrease.
e.	The times-interest-earned ratio will decrease.

3.	Which of the following statements is CORRECT?
a.	The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
b.	If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
c.	An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
d.	An increase in the DSO, other things held constant, could be expected to increase the ROE.
e.	An increase in a firm- debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
	
4.	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?
a.	Company HD pays less in taxes.
b.	Company HD has a lower equity multiplier.
c.	Company HD has a higher ROA.
d.	Company HD has a higher times-interest-earned (TIE) ratio.
e.	Company HD has more net income.
	

5.	Which of the following statements is CORRECT?
a.	If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.
b.	If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
c.	If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d.	If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
e.	The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.




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