Answer Choices:
a. Even though Firm A’s current ratio exceeds that of Firm B, Firm B’s quick ratio might exceed that of A.
b. However, if A’s quick ratio exceeds B’s, then we can be certain that A’s current ratio is also larger than B’s.
c. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.
d. Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
e. Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
Answer: b. However, if A’s quick ratio exceeds B’s, then we can be certain that A’s current ratio is also larger than B’s.
Question: Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?
Answer Choices:
a. $41,234
b. $43,405
c. $45,689
d. $48,094
e. $50,625
Answer: e. $50,625
Question: X-1 Corp’s total assets at the end of last year were $405,000 and its EBIT was $52,500. What was its basic earning power (BEP) ratio?
Answer Choices:
a. 11.70%
b. 12.31%
c. 12.96%
d. 13.61%
e. 14.29%
Answer: c. 12.96%
Question: Zero Corp’s total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?
Answer Choices:
a. 14.82%
b. 15.60%
c. 16.42%
d. 17.28%
e. 18.15%
Answer: d. 17.28%
Question: River Corp’s total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?
Answer Choices:
a. 7.89%
b. 8.29%
c. 8.70%
d. 9.14%
e. 9.59%
Answer: a. 7.89%
Question: Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?
Answer Choices:
a. 2.07
b. 2.26
c. 2.38
d. 2.26
e. 2.49
Answer: c. 2.38
Question: Berenek Corp has $720,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
Answer Choices:
a. $273,600
b. $288,000
c. $302,400
d. $317,520
e. $333,396
Answer: e. $333,396