Finance Homework Essay

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Week 2 Chapter 3 Homework 1. Which of the following statements is CORRECT? Answer: e. An increase in a firm’s debt ratio, with no changes in sales or operating cost, could be expected to lower the profit margin. 2. Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? Answer: e. Company HD has a lower times interest earned (TIE) ratio. 3. Companies HD and LD have the same total assets, sales, operating costs, and tax rates and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT? Answer: e. If the interest rate the companies pay on their debt is less than their earning power. (BEP), then Company HD will have the higher ROE. 4. Muscarella Inc. has the following balance sheet and income statement data: Cash $ 14,000 Accounts payable $ 42,000 Receivables 70,000 Other current liabilities 28,000 Inventories 210,000 Total CL $ 70,000 Total CA $294,000 Long-term debt 70,000 Net fixed assets 126,000 Common equity $280,000 Total Assets $420,000 Total liab. and equity $420,000 Sales $280,000 Net income $ 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current

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