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problem1. Which of the following statements is right give an appropriate reason?

A. When one firm has a higher debt ratio than the other one, we can be convinced that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends completely on the amount of debt a firm uses.

B. A firm’s use of debt will have no consequence on its profit margin.

C. If two firms differ only in their use of debt—that is, they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--however one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and lower return on assets.

D. The debt ratio as it is basically computed makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease dissimilar percentages of their assets are still comparable.

E. If two firms differ only in their use of debt—that is, they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm which uses more debt will have a higher operating margin and return on assets.

problem2. Austin Financial recently announced that its net income risen sharply from the previous year, yet its net cash provided from operations declined. Which of the following could describe this performance?

A. The company’s dividend payment to common stockholders refused.

B. The company’s expenditures on fixed assets refused.

C. The company’s cost of goods sold risen.

D. The company’s depreciation expense refused.

E. The company’s interest expense rose. 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, hence, a higher interest expenditure.

problem3. Which of the following statements is right?

A. Company HD has 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 lower times-interest-earned (TIE) ratio. The retained earnings account on the balance sheet doesn’t represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings. True False

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93967

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