Strayer FIN534 Week 2 Homework Assignment Chapter 3

FIN 534 Week 2 Homework Assignment
Chapter 3
1. A firm wants to strengthen its financial position. Which of the
following actions would increase its quick ratio?
a. Issue new common stock and use the proceeds to acquire
additional fixed assets.
b. Offer price reductions along with generous credit terms that
would (1) enable the firm to sell some of its excess inventory and (2) lead to
an increase in accounts receivable.
c. Issue new common stock and use the proceeds to increase
inventories.
d. Speed up the collection of receivables and use the cash
generated to increase inventories.
e. Use some of its cash to purchase additional inventories.
2. Amram Company’s current ratio is 1.9. Considered alone, which
of the following actions would reduce the company’s current ratio?
a. Use cash to reduce accounts payable.
b. Borrow using short-term notes payable and use the proceeds to
reduce accruals.
c. Borrow using short-term notes payable and use the proceeds to
reduce long-term debt.
d. Use cash to reduce accruals.
e. Use cash to reduce short-term notes payable.
3. Which of the following statements is CORRECT?
a. If a firm increases its sales while holding its accounts
receivable constant, then, other things held constant, its days’ sales
outstanding will decline.
b. If a security analyst saw that a firm’s days’ sales outstanding
(DSO) was higher than the industry average and was also increasing and trending
still higher, this would be interpreted as a sign of strength.
c. If a firm increases its sales while holding its accounts
receivable constant, then, other things held constant, its days’ sales
outstanding (DSO) will increase.
d. There is no relationship between the days’ sales outstanding
(DSO) and the average collection period (ACP). These ratios measure entirely
different things.
e. A reduction in accounts receivable would have no effect on the
current ratio, but it would lead to an increase in the quick ratio.
4. Which of the following statements is CORRECT?
a. If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, and tax
rates¾but one firm has a higher debt ratio, the firm that uses more debt
will have a higher profit margin on sales.
b. If one firm has a higher debt ratio than another, we can be
certain that the firm with the higher debt ratio will have the lower TIE ratio,
as that ratio depends entirely on the amount of debt a firm uses.
c. A firm’s use of debt will have no effect on its profit margin
on sales.
d. If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, interest
rates on their debt, and tax rates¾but one firm has a higher debt ratio, the firm that uses more debt
will have a lower profit margin on sales.
e. The debt ratio as it is generally calculated makes an
adjustment for the use of assets leased under operating leases, so the debt
ratios of firms that lease different percentages of their assets are still
comparable.
5. Which of the following statements is CORRECT?
a. If Firms X and Y have the same net income, number of shares
outstanding, and price per share, then their market-to-book ratios must also be
the same.
b. If Firms X and Y have the same P/E ratios, then their
market-to-book ratios must also be the same.
c. If Firms X and Y have the same net income, number of shares
outstanding, and price per share, then their P/E ratios must also be the same.
d. If Firms X and Y have the same earnings per share and
market-to-book ratio, they must have the same price earnings ratio.
e. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely
to be less risky and also to be expected to grow at a faster rate.