Week 2 Homework

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1. Which of the following statements is CORRECT?

a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.

b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.

c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.

d. An increase in the DSO, other things held constant, could be expected to increase the ROE.

e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, 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?

a. Company HD has a lower equity multiplier.

b. Company HD has more net income.

c. Company HD pays more in taxes.

d. Company HD has a lower ROE.

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?

a. Given this information, LD must have the higher ROE.

b. Company LD has a higher basic earning power ratio (BEP).

c. Company HD has a higher basic earning power ratio (BEP).

d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.

e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.
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