Chapter 2--Analysis of Fina - Copy

False 34 suppose two firms with the same amount of

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FALSE 34. 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. TRUE 35. Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will pay on that debt and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio. TRUE 36. The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings. Therefore, the fixed charge coverage is more inclusive than the TIE ratio. TRUE 37. If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease. FALSE 38. Selling new stock is an equity transaction; it does not affect any asset or liability account and therefore, does not appear on the statement of cash flows. FALSE
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39. Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.) A. Fixed assets are sold for cash. B. Cash is used to purchase inventories. C. Cash is used to pay off accounts payable. D. Accounts receivable are collected. E. Long-term debt is issued to payoff a short-term bank loan. 40. Changes in balance sheet accounts are necessary for 41. All of the following represent cash outflows to the firm except 42. Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the firm's 43. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0? A. Fixed assets are sold for cash. B. Long-term debt is issued to pay off current liabilities. C. Accounts receivable are collected. D. Cash is used to pay off accounts payable. E. A bank loan is obtained, and the proceeds are credited to the firm's checking account.
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