Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 3, Problem 11QAP
Summary Introduction
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Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
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Analyze and compare the following firms financial ratio results. Which seems to be in a better financial position? Why?
Ratio
Firm A
Firm B
Debt-To-Equity
0.65
2.23
Current Ratio
1.74
0.83
Net Profit Margin
8.07%
9.59%
Return On Equity
12.81%
47.17%
-
Assuming Target’s industry had an average current ratio of 1.0 and an average debtto equity ratio of 2.5, comment on Target’s liquidity and long-term solvency.
A company has an equity multiplier of 3.2, and its assets are financed with some combinationof long-term debt and common equity. What is its debt to asset ratio?
Chapter 3 Solutions
Corporate Finance
Ch. 3 - Financial Ratio Analysis A financial ratio by...Ch. 3 - Industry-Specific Ratios So-called same-store...Ch. 3 - Sales Forecast Why do you think most long-term...Ch. 3 - Sustainable Growth In the chapter, we used...Ch. 3 - EFN and Growth Rate Broslofski Co. maintains a...Ch. 3 - Common-Size Financials One tool of financial...Ch. 3 - Asset Utilization and EFN One of the implicit...Ch. 3 - Comparing ROE and ROA Both ROA and ROE measure...Ch. 3 - Ratio Analysis Consider the ratio EBITD/Assets....Ch. 3 - Return on Investment A ratio that is becoming more...
Ch. 3 - Use the following information to answer the next...Ch. 3 - Prob. 12CQCh. 3 - Use the following information to answer the next...Ch. 3 - Use the following information to answer the next...Ch. 3 - Use the following information to answer the next...Ch. 3 - DuPont Identity If Muenster, Inc., has an equity...Ch. 3 - Equity Multiplier and Return on Equity Synovec...Ch. 3 - Prob. 3QAPCh. 3 - EFN The most recent financial statements for...Ch. 3 - Prob. 5QAPCh. 3 - Sustainable Growth If the Moran Corp. has an ROE...Ch. 3 - Prob. 7QAPCh. 3 - Prob. 8QAPCh. 3 - Prob. 9QAPCh. 3 - Prob. 10QAPCh. 3 - Prob. 11QAPCh. 3 - Prob. 12QAPCh. 3 - External Funds Needed The Optical Scam Company has...Ch. 3 - Days' Sales in Receivables A company has net...Ch. 3 - Prob. 15QAPCh. 3 - Prob. 16QAPCh. 3 - Prob. 17QAPCh. 3 - Prob. 19QAPCh. 3 - Prob. 20QAPCh. 3 - Calculating EFN The most recent financial...Ch. 3 - Prob. 22QAPCh. 3 - Prob. 23QAPCh. 3 - Prob. 26QAPCh. 3 - Prob. 27QAPCh. 3 - Prob. 28QAPCh. 3 - Prob. 29QAPCh. 3 - Prob. 30QAPCh. 3 - Calculate all of the ratios listed in the industry...Ch. 3 - Prob. 2MCCh. 3 - Prob. 3MCCh. 3 - Prob. 4MCCh. 3 - Prob. 5MC
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- Assuming total invested capital = total assets, which of the following would have the highest equity multiplier? Enter question A. Company A with a debt to capital ratio of 80% B. Company B with a debt to capital ratio of 25% C. Company C with a debt to capital ratio of 60% D. Company D with a debt to capital ratio of 10%arrow_forwardYou have the following ratios for a firm you're analyzing: Working capital / total assets = 0.7 Retained earnings / total assets = 0.3 EBIT / total assets = 0.2 market value of equity / book value of LT debt = 1.3 sales / total assets = 0.4 Calculate the firm's Z-score. Enterarrow_forwardReturn on equity (ROE) using the traditional DuPont formula equals to A. (net profit margin) (interest component) (solvency ratio) B. (net profit margin) (interest component) (liquidity ratio) C. (net profit margin) (total asset turnover) (quick ratio) D. (net profit margin) (total asset turnover) (solvency ratio)arrow_forward
- Requirement 1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. a. Acid-test ratio b. Inventory turnover c. Days’ sales in receivables d. Debt ratio e. Earnings per share of common stock f. Price/earnings ratio g. Dividend payoutarrow_forwarda company debt/ total assesses ratio of 25% and b company 20% with return on total assets of 10% and 7% respectively, which firm has a greater return on equity?? could find it for me?arrow_forwardCompute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. Debt Ratio Earning per share of common stocks Price/earning ration Dividend payoutarrow_forward
- Q.3. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (Debt/total Assets) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. Which firm is better and why? ****arrow_forwardAssume the following relationships for the Caulder Corp.: Sales/Total assets Return on assets (ROA) Return on equity (ROE) Calculate Caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: Debt-to-capital ratio: % % 1.9x 8.0% 13.0%arrow_forwardUnder what situation will return on equity be higher than return on investment? a. When assets exceed liabilities. b. When the debt to equity ratio is greater than 1.0. c. When net income is higher than it was in the previous year. d. When a company earns more on borrowed money than the interest it must pay.arrow_forward
- DeSoto Tools Incorporated is planning to expand production. The expansion will cost $3,000,000, which can be financed either by bonds at an interest rate of 8 percent or by selling 60,000 shares of common stock at $50 per share. The current income statement before expansion is as follows: DESOTO TOOLS INCORPORATED Income Statement 20x1 Sales Variable costs Fixed costs Earnings before interest and taxes Interest expense Earnings before taxes Taxes 30% Earnings after taxes Shares Earnings per share $ 3,100,000 620,000 810,000 $ 1,670,000 500,000 $ 1,170,000 351,000 $ 819,000 200,000 $4.10 After the expansion, sales are expected to increase by $1,600,000. Variable costs will remain at 20 percent of sales, and fixed costs will increase to $1,370,000. The tax rate is 30 percent. a. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage before expansion. (For the degree of operating leverage, use the formula: DOL= For the degree of…arrow_forward. A firm, its debt, and equity have β of 1.0, 0.5, and 3.0, respectively. What is the firm’s equity ratio?arrow_forwardUsing the Du Pont Identity Method, calculate return on equity given the following information. Profit margin 16%; total asset turnover 0.85; equity multiplier 1.5. OA. OB. O C. O D. OE 20.40% 21.40% 22.40% 23.40% 24.40%arrow_forward
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