Its debt - to - equity ratio from 0.35 to 0.50 from 2003 to 2005.

B. The company is becoming less liquid, as evidenced by the increase in its debt - to -

equity ratio from 0.35 to 0.50 from 2003 to 2005.

C. The company is becoming increasingly more liquid, as evidenced by the increase in

its debt - to - equity ratio from 0.35 to 0.50 from 2003 to 2005.

7. With regard to the data in Problem 6, what would be a reasonable explanation of these

fi nancial results?

A. The decline in the company ’ s equity results from a decline in the market value of this

company ’ s common shares.

B. The increase of € 250 in the company ’ s debt from 2003 to 2005 indicates that lenders

are viewing the company as increasingly creditworthy.

C. The decline in the company ’ s equity indicates that the company may be incurring

losses on its operations, paying dividends greater than income, and/or repurchasing

Shares.

8. Linda Roper observes a decrease in a company ’ s inventory turnover. Which of the following

would explain this trend?

A. The company installed a new inventory management system, allowing more effi cient

inventory management.

B. Due to problems with obsolescent inventory last year, the company wrote off a large

amount of its inventory at the beginning of the period.

C. The company installed a new inventory management system but experienced some

Operational diffi culties resulting in duplicate orders being placed with suppliers.

9. Which of the following would best explain an increase in receivables turnover?

A. The company adopted new credit policies last year and began offering credit to customers

with weak credit histories.

B. Due to problems with an error in its old credit scoring system, the company had

Accumulated a substantial amount of uncollectible accounts and wrote off a large

amount of its receivables.

C. To match the terms offered by its closest competitor, the company adopted new payment

terms now requiring net payment within 30 days rather than 15 days, which

had been its previous requirement.

10. Brown Corporation had an average days ’ sales outstanding of 19 days in 2005. Brown

wants to decrease its collection period in 2006 to match the industry average of 15 days.

Credit sales in 2005 were $300 million, and Brown expects credit sales to increase to

$390 million in 2006. To achieve Brown ’ s goal of decreasing the collection period, the

change in the average accounts receivable balance from 2005 to 2006 that must occur is

closest to

A. _ $1.22 million.

B. _ $0.42 million.

C. $0.42 million.

11. An analyst gathered the following data for a company:

2003 2004 2005

ROE 19.8% 20.0% 22.0%

Return on total assets 8.1% 8.0% 7.9%

Total asset turnover 2.0 2.0 2.1

Based only on the information above, the most appropriate conclusion is that, over the

period 2003 to 2005, the company ’ s

A. net profi t margin and fi nancial leverage have decreased.

B. net profi t margin and fi nancial leverage have increased.

C. net profi t margin has decreased but its fi nancial leverage has increased.

12. A decomposition of ROE for Integra SA is as follows:

2005 2004

ROE 18.90% 18.90%

Tax burden 0.70 0.75

Interest burden 0.90 0.90

EBIT margin 10.00% 10.00%

Asset turnover 1.50 1.40

Leverage 2.00 2.00

Which of the following choices best describes reasonable conclusions an analyst might

make based on this ROE decomposition?

A. Profi tability and the liquidity position both improved in 2005.

B. The higher average tax rate in 2005 offset the improvement in profi tability, leaving

ROE unchanged.

Date: 2016-03-03; view: 816