Scenario A car manufacturing company loses 40% of its market share and has a declining investment in new product development. A start-up company is struggling with finances for its projects. A company's interest coverage ratio improves. A company's credit rating was upgraded from AA to AAA. Impact on Yield Increase Increase Decrease Decrease Cost of Borrowing Money from Bond Markets Less expensive More expensive More expensive More expensive

Scenario A car manufacturing company loses 40% of its market share and has a declining investment in new product development. A start-up company is struggling with finances for its projects. A company's interest coverage ratio improves. A company's credit rating was upgraded from AA to AAA. Impact on Yield Increase Increase Decrease Decrease Cost of Borrowing Money from Bond Markets Less expensive More expensive More expensive More expensive

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter12: Fainancial Statement Analysis

Section: Chapter Questions

Problem 3MCQ

See similar textbooks

Similar questions

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Days sales outstandinga aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) $78 Accounts payable 74 147 $299 Less depreciation Industry Average Ratios Net fixed assets. Total assets 2x 15% 5x 10x 9x 25days Fixed assets turnover Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital 216 55 $161 $460 Other current liabilities Notes payable Total current liabilities Long-term debt Total…
You are working for a mid-sized company that is looking to estimate its cost of debt. The company has never had an issuance in the bond market. What would be the best proxy to estimate its cost of debt? A. Cost of its bank debt B. Cost of its equity C. Cost of debt from companies of a similar market capitalization D. Cost of debt in the corporate bond market
“Four Cs of credit analysis” is used by analysts to evaluate creditworthiness. For each of the following scenarios, which of the “Four Cs” should be used for evaluation? Please also explain your answers. Scenarios Which of the “Four Cs” 1. Company Z cannot issue dividends unless all bondholders have been paid the interests or coupons. In addition, the dividend payments cannot be greater than 30% of company’s annual EBIT. 2. Company Y decides to issue debt, but its management is less credible with poor track records. 3. Company X has to pay $50,000 interest expense every year if debt is issued, but it only has an operating cash flow of $40,000 per year. 4. Company ABC decides to issue debt. However, it operates in an industry with 10 competitors, and it only has a market share of 3%. Investors are concerned with X’s ability to maintain stable cash flows over time.
You are considering buying stock in the following two banks. Each of the banks has assets that are solely long-term corporate bonds. Bank One is financed by 10% equity and 90% deposits. Bank Two is financed by 25% equity and 75% deposits. Which of the following scenarios would lead to the best outcome for Bank One relative to Bank Two? Higher inflation A recession Improving corporate credit ratings
Debt management ratios measure how effectively the firm uses its plant and equipment. Which of the following statements is CORRECT? The use of debt will always decrease a firm's ROE. O Debt exposes the firm to more financial risk than if it was financed only with equity. Firms with relatively high debt ratios typically have lower expected returns when the economy is normal, but experience higher returns and possibly face bankruptcy if the economy goes into a recession. The TIE ratio measures the extent to which operating income can increase before the firm is unable to meet its annual interest costs.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.
Suppose that the yield of bonds issued by firms XYZ decreased. Which of the following the scenario is the LEAST likely one to have caused this decrease? 1(a) The firm's credit rating went up. (b) The firm's collateral value went up. (c) Investors’ demand for assets went up. (d) A lot of other firms started to issue bonds.
A firm has been experiencing low profitability in recent years. Performan analysis of the firm’s financial position using the DuPont equation. The firm has no leasepayments but has a $2 million sinking fund payment on its debt. The most recent industryaverage ratios and the firm’s financial statements are as follows: a. Calculate the ratios you think would be useful in this analysis.b. Construct a DuPont equation, and compare the company’s ratios to the industry averageratios.c. Do the balance sheet accounts or the income statement figures seem to be primarilyresponsible for the low profits?d. Which specific accounts seem to be most out of line relative to other firms in the industry?e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during theyear, how might that affect the validity of your ratio analysis? How might you correctfor such potential problems?
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent Industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Days sales outstanding *Calculation is based on a 365-day year. Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Less depreciation Industry Average Ratios Net fixed assets Total assets 2x 15% 5x 10x 9x Balance Sheet as of December 31, 2021 (millions of dollars) $ 78 Accounts payable 74 Other current liabilities Notes payable Taxes (25%) Net Income 25days 147 $299 216 55 $161 $460 Fixed assets turnover Profit margin Total assets turnover Equity multiplier Total assets turnover Profit margin Return on total assets Return on common…
A lending officer at C Bank has insisted that your firm improve the current ratio of 0.8 before the bank will consider a loan. Which of the following actions would INCREASE the ratio? Group of answer choices: Selling some of the existing inventory at cost Using cash to pay off current liabilities Borrowing long-term debt to pay off short-term bank loan Paying off long-term debt. Collecting some of the current accounts receivable
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $3 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio 2 × Fixed assets turnover 6 × Debt-to-capital ratio 19 % Total assets turnover 3 × Times interest earned 7 × Profit margin 5.75 % EBITDA coverage 9 × Return on total assets 17.25 % Inventory turnover 7 × Return on common equity 19.40 % Days sales outstandinga 23 days Return on invested capital 17.30 % aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) Cash and equivalents $ 77 Accounts payable $ 48 Accounts receivables 72 Other current liabilities 29 Inventories 178 Notes payable 58 Total current assets $ 327…
How would each of the following factors affectratio analysis? (a) The firm’s sales are highly seasonal. (b) The firm uses some type of windowdressing. (c) The firm issues more debt and usesthe proceeds to repurchase stock. (d) The firmleases more of its fixed assets than most firmsin its industry. (e) In an effort to stimulate sales,the firm eases its credit policy by offering 60-daycredit terms rather than the current 30-day terms.How might one use sensitivity analysis to helpquantify the answers?