Chapter 3 - Financial Ratios

Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?

• The TIE declines.

• The DSO increases.

• The ROE increases.

• The current and quick ratios both decline.

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

• Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

• Use cash to repurchase some of the company’s own stock.

• Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

• Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?

• 4.72

• 4.97

• 5.23

• 5.80

Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

• $158,750

• $166,688

• $175,022

• $183,773

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

• 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.

• Issue new common stock and use the proceeds to increase inventories

• Speed up the collection of receivables and use the cash generated to increase inventories.

• Use some of its cash to purchase additional inventories.

Info Technics Inc. 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?

• 25%

• 36.36%

• 52.48%

• 63.64%

Jericho Motors has $40 million in total assets.  The other side of its balance sheet consists of $4 million in current liabilities, $12 million in long-term debt, and $24 million in common equity.  The company has 500 thousand shares of common stock outstanding, and its stock price is $250 per share.  What is Jericho’s market-to-book ratio ?

• 2.00

• 4.27

• 5.21

• 3.57

International Appliances Inc. has a current ratio of 0.5.  Which of the following actions would improve (increase) this ratio?

• Use cash to pay off current liabilities.

• Collect some of the current accounts receivable.

• Use cash to pay off some long-term debt.

• Purchase additional inventory on credit (accounts payable).

Assume that International Appliances has a current ratio of 1.2.  Now, which of the following actions would improve (increase) this ratio?

• Use cash to pay off current liabilities.

• Collect some of the current accounts receivable.

• Use cash to pay off some long-term debt.

• Purchase additional inventory on credit (accounts payable).

Companies (A) and (B) are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company (A) has the higher debt ratio. Which of the following statements is CORRECT?

• Company (A) has a lower total assets turnover than Company (B).

• Company (A) has a lower equity multiplier than Company (B).

• Company (A) has a higher fixed assets turnover than Company (B).

• Company (A) has a higher ROE than Company (B).