FIN 534 Week 2 Homework Assignment Chapter 3
1. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?
a. Issue new common stock and use the proceeds to acquire additional fixed assets.
b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
c. Issue new common stock and use the proceeds to increase inventories.
d. Speed up the collection of receivables and use the cash generated to increase inventories.
e. Use some of its cash to purchase additional inventories.
2. Amram Companys current ratio is 1.9. Considered alone, which of the following actions would reduce the companys current ratio?
a. Use cash to reduce accounts payable.
b. Borrow using short-term notes payable and use the proceeds to reduce accruals.
c. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
d. Use cash to reduce accruals.
e. Use cash to reduce short-term notes payable.
3. Which of the following statements is CORRECT?
a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days sales outstanding will decline.
b. If a security analyst saw that a firms days sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
c. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days sales outstanding (DSO) will increase.
d. There is no relationship between the days sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
e. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
4. Which of the following statements is CORRECT?
a. If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, and tax rates¾but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
b. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
c. A firms use of debt will have no effect on its profit margin on sales.
d. If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates¾but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
e. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
5. Which of the following statements is CORRECT?
a. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
b. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
c. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
d. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
e. If Firm Xs P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.