Q&A Hero

Q: One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. a. True b. False

Q: One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE. a. True b. False

Q: A firm's ROE is equal to 9% and its ROA is equal to 6%. The firm finances only with short-term debt, long-term debt, and common equity, so assets equal total invested capital. The firm's total debt to total capital ratio must be 50%. a. True b. False

Q: If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5. a. True b. False

Q: Suppose Firms A and B have the same amount of assets, total assets are equal to total invested capital, pay the same interest rate on their debt, have the same basic earning power (BEP), finance with only debt and common equity, and have the same tax rate. However, Firm A has a higher debt to capital ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio. a. True b. False

Q: 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. a. True b. False

Q: Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's. a. True b. False

Q: Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time. a. True b. False

Q: Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%. a. True b. False

Q: 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. a. True b. False

Q: The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as less risky and/or more likely to enjoy higher growth in the future. a. True b. False

Q: The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as less risky and/or more likely to enjoy higher growth in the future. a. True b. False

Q: In general, if investors believe that a company is relatively risky and/or has relatively poor growth prospects, then the company will have relatively high P/E, M/B, and EV/EBITDA ratios. a. True b. False

Q: Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects. These ratios include the Price/Earnings, the Market/Book, and Enterprise Value/EBITDA ratios. a. True b. False

Q: The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income. a. True b. False

Q: The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA). a. True b. False

Q: 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. a. True b. False

Q: Other things held constant, the more debt a firm uses, the lower the firm's return on total assets will be. a. True b. False

Q: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. a. True b. False

Q: Other things held constant, the more debt a firm uses, the lower the firm's operating margin will be. a. True b. False

Q: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin. a. True b. False

Q: Other things held constant, the more debt a firm uses, the lower the firm's profit margin will be. a. True b. False ANSWER: True LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category. 27. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin. a. True b. False ANSWER: False RATIONALE: A's higher total debt to total capital ratio would tend to lower its profit margin. Since its margin is already higher, this indicates that A is the better managed company. LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category.

Q: It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all of the firms being compared have the same proportion of fixed assets to total assets. a. True b. False

Q: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

Q: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods. a. True b. False

Q: The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed. a. True b. False

Q: The return on invested capital measures the total return that a company has provided for its investors. a. True b. False

Q: The profit margin measures net income per dollar of sales. a. True b. False

Q: The operating margin measures operating income per dollar of assets. a. True b. False

Q: The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects. a. True b. False

Q: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results. a. True b. False

Q: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. a. True b. False

Q: Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. a. True b. False ANSWER: True LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category. 14. The more conservative a firm's management is, the higher the firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be. a. True b. False ANSWER: False LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category. 15. Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)], the higher its TIE ratio will be. a. True b. False ANSWER: False LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category.

Q: If a firm's fixed assets turnover ratio is significantly higher than the average for its industry, then it could be that the firm uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. a. True b. False

Q: The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time. a. True b. False

Q: In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. a. True b. False

Q: A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. a. True b. False

Q: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. a. True b. False

Q: If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. a. True b. False

Q: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase. a. True b. False

Q: If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. a. True b. False

Q: High current and quick ratios always indicate that the firm is managing its liquidity position well. a. True b. False

Q: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position. a. True b. False

Q: Alan and Sara Winthrop are a married couple who file a joint income tax return. They have two children, and they have legitimate itemized deductions totaling $25,750. Their total income from wages is $169,100. Assume the following tax table is applicable: Married Couples Filing Joint Returns If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $19,050 $0.00 10.0% 10.0% $19,050-$77,400 1,905.00 12.0 11.5 $77,400-$165,000 8,907.00 22.0 17.1 $165,000-$315,000 28,179.00 24.0 20.4 $315,000-$400,000 64,179.00 32.0 22.8 $400,000-$600,000 91,379.00 35.0 26.9 Over $600,000 161,379.00 37.0 37.0 What is their average tax rate? ​ a. 16.3% b. 17.93% c. 19.21% d. 17.20% e. 14.64%

Q: Alan and Sara Winthrop are a married couple who file a joint income tax return. They have two children, and they have legitimate itemized deductions totaling $25,750. Their total income from wages is $357,600. Assume the following tax table is applicable: Married Couples Filing Joint Returns If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $19,050 $0.00 10.0% 10.0% $19,050-$77,400 1,905.00 12.0 11.5 $77,400-$165,000 8,907.00 22.0 17.1 $165,000-$315,000 28,179.00 24.0 20.4 $315,000-$400,000 64,179.00 32.0 22.8 $400,000-$600,000 91,379.00 35.0 26.9 Over $600,000 161,379.00 37.0 37.0 What is their federal tax liability? ​ a. $49,048.50 b. $54,707.25 c. $52,820.50 d. $57,851.50 e. $69,571.00

Q: Alan and Sara Winthrop are a married couple who file a joint income tax return. They have two children, and they have legitimate itemized deductions totaling $25,750. Their total income from wages is $251,400. Assume the following tax table is applicable: Married Couples Filing Joint Returns If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $19,050 $0.00 10.0% 10.0% $19,050-$77,400 1,905.00 12.0 11.5 $77,400-$165,000 8,907.00 22.0 17.1 $165,000-$315,000 28,179.00 24.0 20.4 $315,000-$400,000 64,179.00 32.0 22.8 $400,000-$600,000 91,379.00 35.0 26.9 Over $600,000 161,379.00 37.0 37.0 What is their marginal tax rate? ​ a. 32.0% b. 35.0% c. 10.0% d. 24.0% e. 12.0%

Q: Alan and Sara Winthrop are a married couple who file a joint income tax return. They have two children, and they have legitimate itemized deductions totaling $25,750. Their total income from wages is $288,800. What is the couples taxable income? ​ a. $263,050 b. $249,300 c. $192,550 d. $214,800 e. $207,400

Q: Maureen Smith is a single individual. She claims a standard deduction of $12,000. Her salary for the year was $213,650. Assume the following tax table is applicable. Single Individuals If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $9,525 $0.00 10.0% 10.0% $9,525-$38,700 952.50 12.0 11.5 $38,700-$82,500 4,453.50 22.0 17.1 $82,500-$157,500 14,089.50 24.0 20.4 $157,500-$200,000 32,089.50 32.0 22.8 $200,000-$500,000 45,689.50 35.0 30.1 Over $500,000 150,689.50 37.0 37.0 What is her average tax rate? ​ a. 24.34% b. 19.18% c. 22.94% d. 24.58% e. 27.29%

Q: Maureen Smith is a single individual. She claims a standard deduction of $12,000. Her salary for the year was $177,100. Assume the following tax table is applicable. Single Individuals If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $9,525 $0.00 10.0% 10.0% $9,525-$38,700 952.50 12.0 11.5 $38,700-$82,500 4,453.50 22.0 17.1 $82,500-$157,500 14,089.50 24.0 20.4 $157,500-$200,000 32,089.50 32.0 22.8 $200,000-$500,000 45,689.50 35.0 30.1 Over $500,000 150,689.50 37.0 37.0 What is her federal tax liability? ​ a. $30,536.25 b. $45,210.75 c. $34,521.50 d. $40,054.75 e. $30,140.25

Q: Maureen Smith is a single individual. She claims a standard deduction of $12,000. Her salary for the year was $188,000. Assume the following tax table is applicable. Single Individuals If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $9,525 $0.00 10.0% 10.0% $9,525-$38,700 952.50 12.0 11.5 $38,700-$82,500 4,453.50 22.0 17.1 $82,500-$157,500 14,089.50 24.0 20.4 $157,500-$200,000 32,089.50 32.0 22.8 $200,000-$500,000 45,689.50 35.0 30.1 Over $500,000 150,689.50 37.0 37.0 What is her marginal tax rate? ​ a. 35.0% b. 24.0% c. 32.0% d. 22.0% e. 12.0%

Q: Maureen Smith is a single individual. She claims a standard deduction of $12,000. Her salary for the year was $134,750. What is her taxable income? ​ a. $105,698 b. $122,750 c. $129,324 d. $121,863 e. $120,620

Q: Griffey Communications recently realized $120,000 in operating income. The company had interest income of $25,000 and realized $70,000 in dividend income. The companys interest expense was $40,000. Its corporate tax rate is 25%. Griffey is a small company, so it is not subject to the interest expense deduction limitation. Assume a 50% dividend exclusion for tax on dividends. a. $37,000 b. $35,950 c. $35,000 d. $32,000 e. $40,400

Q: Company Z has $90,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from preferred stock it holds in other corporations. Its corporate tax rate is 25%. What is Company Zs tax liability? Assume a 50% dividend exclusion for tax on dividends. a. $27,500 b. $51,300 c. $25,000 d. $5,100 e. $60,100

Q: Lintner Beverage Corp. reported the following information from their financial statements: Operating income (EBIT) = $9,000,000 Interest payments on long-term debt = $1,750,000 Dividend income = $1,000,000 Corporate tax rate = 25% Assume a 50% dividend exclusion for tax on dividends. What is the firms total tax liability? a. $2,412,980 b. $2,361,640 c. $3,106,070 d. $2,156,280 e. $1,937,500

Q: Last year, Martyn Company had $340,000 in taxable income from its operations, $50,000 in interest income, and $100,000 in dividend income. Its corporate tax rate is 25%. What was the companys tax liability for the year? Assume a 50% dividend exclusion for tax on dividends a. $110,000 b. $150,100 c. $125,000 d. $108,522 e. $162,792

Q: Moose Industries has a corporate tax rate of 25%. Last year the company realized $14,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the companys net income for the year? a. $6,497,750 b. $9,375,000 c. $8,883,000 d. $9,705,500 e. $10,280,250

Q: . In 2018, Mays Industries taxable income was -$85,000. In 2019, its taxable income was $120,000. Its corporate tax rate is 25%.Assume that the company takes full advantage of the Tax Codes carry-forward provision. What is the companys tax liability for 2019? a. $14,400 b. $10,500 c. $8,750 d. $12,480 e. $13,650

Q: In 2018, Uniontown Books had EBIT equal to -$1,200,000. In 2019, its EBIT was $1,800,000. The company has no debt, and therefore, pays no interest expense. Its corporate tax rate is 25%. What was Uniontowns tax liability for 2019? (Assume that the company takes full advantage of the carry-forward provision. a. $75,000 b. $950,000 c. $300,000 d. $150,000 e. $225,000

Q: In 2018, Bradshaw Beverages had taxable income of -$800,000. In 2019, its taxable income is $1,250,000. Its corporate tax rate is 25%. Assume that the company takes full advantage of the Tax Codes carry-forward provision.. How much did the company pay in taxes during 2019? a. $392,400 b. $112,500 c. $120,000 d. $108,400 e. $234,000

Q: . In 2018, Salinger Softwares EBIT was -$225,000,000. In 2019, its EBIT is $300,000,000. The company has no debt, so operating income equals earnings before taxes. Its corporate tax rate is 25%. Assume that the company takes full advantage of the carry-forward provision in the Tax Code.. How much tax did the company pay in 2019? a. $84,262,500 b. $60,637,500 c. $85,837,500 d. $18,750,000 e. $20,050,000

Q: In 2018, Collins Co. had taxable income of -$7,500,000. In 2019, the firm has taxable income of $10,000,000. Its corporate tax rate is 25%. Assume that the company takes full advantage of the Tax Codes carry-forward provision. What is Collins tax liability for 2019? a. $453,220 b. $511,190 c. $621,860 d. $627,130 e. $625,000

Q: 85% = 6.43% (T) T = 44.36%

Q: 00% (1 T) = 7.15% [1 50.00% (T)]

Q: 5% = 8.15% [1 50.00% (T)] .9202 = [1 50.00% (T)]

Q: 5% = BT pref. return [1 (1 Div exclusion%)(T)]

Q: A corporation can earn 7.50% if it invests in municipal bonds. The corporation can also earn 8.15% (before-tax) by investing in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate tax rate that makes the corporation indifferent between the two investments? Assume a 50.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.) a. 24.72% b. $22.60% c. 15.95% d. 25.52% e. 31.64%

Q: Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds outstanding that carry a 6.50% interest rate, and its federal-plus-state income tax rate was 25.00%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $1,250. By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes. Do not round the intermediate calculations. Net Income Free Cash Flow ​ a. -$937.50; $312.50 b. -$731.25; $337.50 c. -$1,106.25; $253.13 d. -$956.25; $306.25 e. -$1,143.75; $234.38

Q: 8125 = (1 T) T = 18.75%

Q: 50% = 8.00% (1 T)

Q: A 5-year corporate bond yields 8.00%. A 5-year municipal bond of equal risk yields 6.50%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? (Round your final answer to two decimal places.) a. 15.56% b. 20.06% c. 21.56% d. 14.63% e. 18.75%

Q: 25% = BT yield 65.00% BT yield = 6.54%

Q: 25% = BT yield (1 T)

Q: A bond issued by the State of Pennsylvania provides a 4.25% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket? a. 7.19% b. 8.11% c. 6.54% d. 7.98% e. 5.43%

Q: 80% = BT yield 68.00% BT yield = 7.06%

Q: 80% = BT yield (1 T)

Q: A 7-year municipal bond yields 4.80%. Your marginal tax rate (including state and federal taxes) is 32.00%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places.) a. 8.68% b. 8.19% c. 6.00% d. 6.28% e. 7.06%

Q: 6250 = (1 T) T = 37.50%

Q: 50% = 8.80% (1 T)

Q: A corporate bond currently yields 8.80%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.50%. At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places.) a. 45.00% b. 33.75% c. 37.50% d. 42.00% e. 28.50%

Q: A corporation recently purchased some preferred stock that has a before-tax yield of 8.00%. The company has a tax rate of 25%. What is the after-tax return on the preferred stock? Assume a 50% dividend exclusion for tax on dividends. (Round your final answer to two decimal places.) a. 6.30% b. 7.00% c. 7.14% d. 7.98% e. 6.02%