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FIN - Homework Chapter 4 Assignment




Question;Select the BEST answer from the choices given.1. An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% andCompany B has a debt ratio of 25%. In his report, the analyst is concerned about Company B'sdebt level, but not about Company A's debt level. Which of the following would best explainthis position?a. Company B has much higher operating income than Company Ab. Company B has a higher operating return on assets than Company A, but Company A has ahigher return on equity than Company Bc. Company A has a lower times interest earned ratio and thus the analyst is not worried aboutthe amount of debtd. Company B has more total assets than Company A5. Company A has a higher days sales outstanding ratio than Company B. Therefore, ________.a. Company A may have a more lenient credit policy than Company Bb. Company A must be managing its accounting receivable better than Company Bc. Company A must be collecting its accounts receivable faster than Company B, on averaged. Company A must have higher sales than Company B7. HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to30% this year, nearly 10% higher than the industry average. However, HighLevs stock pricedecreases relative to its industry counterparts. How is this possible?a. Markets are inefficient and fail to recognize the benefits of leverageb. The increased debt resulted in interest payments that made HighLevs operating income dropeven though return on equity increasedc. Shareholders are not interested in return on equityd. the high levels of debt increased the riskiness of HighLev relative to its competitors8. The current ratio of a firm would be increased by which of the following?a. inventories are sold on a credit basisb. equipment is purchased, financed by a long-term debt issuec. inventories are sold for cashd. land held for investment is sold for cashTable 4-2X Company Balance SheetAssets:Cash and marketable securities $300,000Accounts receivable 1,215,000Inventories 1,747,500Prepaid expenses 24,000Total current assets 3,286,500Fixed assets2,700,000Less: accum. depr.(1,087,500)Net fixed assets 1,612,500Total assets $4,899,000Liabilities:Accounts payable $400,000Notes payable665,000Accrued taxes 42,000Total current liabilities $1,107,000Long-term debt 975,000Common Stock (100,000 shares) 100,000Retained Earnings 2,717,000Total liabilities and owner's equity $4,899,000Net sales (all credit) $6,375,000Less: Cost of goods sold (4,312,500)Selling and administrative expense (1,388,000)Depreciation expense (135,000)Interest expense (127,000)Earnings before taxes $412,500Income taxes (225,000)Net income $187,500Common stock dividends $97,500Common Shares Outstanding 100,0009. Based on the information in Table 4-2, the current ratio is ________.a. 2.97b. 1.46c. 2.11d. 2.2310. Based on the information in Table 4-2, the quick ratio is ________.a. 2.97b. 1.31c. 1.37d. 2.1111. Based on the information in Table 4-2, the average collection period is ________.a. 70 daysb. 84 daysc. 64 daysd. 127 days12. Based on the information in Table 4-2, the debt ratio is ________.a. 0.70b. 0.20c. 0.74d. 0.4213. Based on the information in Table 4-2, the inventory turnover ratio is ________.a. 0.29 timesb. 2.35 timesc. 0.43 timesd. 2.47 times14. Based on the information in Table 4-2, the return on equity is ________.a. 3.46%b. 5.47%c. 6.66%d. 6.90%16. Based on the information in Table 4-2, the times interest earned ratio is ________.a. 1.48b. 3.25c. 4.75d. 4.25


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