Review Ch. 2,3 (1)

Review Ch. 2,3 (1) - Chapter 2 and 3 Review 1....

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Chapter 2 and 3 Review 1. International Appliances has a current ratio of .5. Which of the following actions would improve this ratio? a. Use cash to pay off current liabilities b. Collect some of the current accounts receivable c. Use cash to pay off some long term debt d. Purchase additional inventory on credit 2. Now assume International Appliances has a current ratio of 1.2, not .5. Which of the following actions would improve this ratio? a. Use cash to pay off current liabilities b. Collect some of the current accounts receivable c. Use cash to pay off some long term debt d. Purchase additional inventory on credit e. Use cash to pay for some fixed assets 3. Which of the following is true? a. Having a high current ratio and a high quick ratio is always a good indication that a firm is managing its liquidity position well. b. A decline in the inventory turnover ratio suggests that the firm’s liquidity is improving c. If a firm’s times interest earned ratio is relatively high, then this is one indication that the firm should be able to meet its debt obligations. d. Since ROA measures the firm’s effective utilization of assets (without considering how those assets are financed), two firms with the same EBIT must have the same ROA. e. If, through specific managerial actions, a firm has been able to increase its ROA, then, because of the fixed mathematical relationship between ROA and ROE, it must have increased its ROE. 4. Which of the following is true? a. Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets and that ROA is positive. However, one firm has a higher debt ratio. Under these conditions, the firm with the higher debt ratio will also have a higher rate of return on common equity. b. One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some cash to pay off some current liabilities, the current ratio will always increase, especially if the current ratio is weak initially, for example, below 1.0. c. Generally firms with high profit margins have high asset turnover ratios and firms with low profit margins have low turnover ratios; this result is exactly as predicted by the extended DuPont equation.
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d. Firms A and B have identical earnings and identical dividend payout ratios. If Firm A’s growth ratio is higher than firm B’s, then Firm A’s P/E ratio must be greater than Firm B’s P/E ratio. 5. Info Technics has an equity multiplier of 2.75. The company’s assets are financed with some combination of long term debt and common equity. What is the company’s debt ratio? a. 25% b. 36.36% c. 52.48% d. 63.64% e. 75% 6. A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40% and a profit margin of 6%. What is the firm’s times interest earned ratio? a.
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This note was uploaded on 11/21/2011 for the course BMGT 340 taught by Professor White during the Fall '08 term at Maryland.

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Review Ch. 2,3 (1) - Chapter 2 and 3 Review 1....

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