1. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? a. The company issued new common stock. b. The company made large investments in fixed assets. c. The company sold a division and received cash in return. d. The company cut its dividend. e. The company issued new long-term debt. 2. Which of the following statements is CORRECT? a. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be. b. Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk. c. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. d. Other things held constant, the more debt a firm uses, the higher its operating margin will be. e. Other things held constant, the more debt a firm uses, the higher its profit margin will be. 3. Please see attachments and show workings **Exhibit 4.1**The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.### Balance Sheet (Millions of $)#### Assets | 2018- Cash and securities: $3,000- Accounts receivable: $15,000- Inventories: $18,000- **Total current assets**: $36,000- Net plant and equipment: $24,000- **Total assets**: $60,000#### Liabilities and Equity- Accounts payable: $18,630- Accruals: $8,370- Notes payable: $6,000- **Total current liabilities**: $33,000- Long-term bonds: $9,000- **Total liabilities**: $42,000- Common stock: $5,040- Retained earnings: $12,960- **Total common equity**: $18,000- **Total liabilities and equity**: $60,000### Income Statement (Millions of $)- The income statement section is not visible in this image.**Explanation:**The balance sheet provides a snapshot of Koski Inc.'s financial position as of 2018. It shows that the company's total assets equal its total liabilities and equity, both amounting to $60,000 million. The balance sheet is divided into assets, liabilities, and equity, demonstrating how the company's resources are financed.- **Assets**: Comprised of current assets like cash, receivables, and inventories, along with non-current assets like net plant and equipment.- **Liabilities**: Include current liabilities such as accounts payable, accruals, and notes payable, as well as long-term debt in the form of bonds.- **Equity**: Represents shareholder's equity, including common stock and retained earnings, leading to a balance with total assets. **Income Statement (Millions of $) for 2018**- **Net sales:** $84,000- **Operating costs except depreciation:** $78,120- **Depreciation:** $1,680- **Earnings before interest and taxes (EBIT):** $4,200- **Less interest:** $900- **Earnings before taxes (EBT):** $3,300- **Taxes:** $1,320- **Net income:** $1,980**Other Data:**- **Shares outstanding (millions):** 500.00- **Common dividends (millions of $):** $693.00- **Interest rate on notes payable & long-term bonds:** 6%- **Federal plus state income tax rate:** 40%- **Year-end stock price:** $47.52**Question:**Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.- a. 45.45%- b. 39.09%- c. 44.09%- d. 38.18%- e. 39.55%

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Answered: Analysts who follow Howe Industries…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

1. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

a. The company issued new common stock.

b. The company made large investments in fixed assets.

c. The company sold a division and received cash in return.

d. The company cut its dividend.

e. The company issued new long-term debt.

2. Which of the following statements is CORRECT?

a. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be.

b. Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.

c. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

d. Other things held constant, the more debt a firm uses, the higher its operating margin will be.

e. Other things held constant, the more debt a firm uses, the higher its profit margin will be.

3. Please see attachments and show workings

**Exhibit 4.1**

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

### Balance Sheet (Millions of $)

#### Assets | 2018
- Cash and securities: $3,000
- Accounts receivable: $15,000
- Inventories: $18,000
- **Total current assets**: $36,000
- Net plant and equipment: $24,000
- **Total assets**: $60,000

#### Liabilities and Equity
- Accounts payable: $18,630
- Accruals: $8,370
- Notes payable: $6,000
- **Total current liabilities**: $33,000
- Long-term bonds: $9,000
- **Total liabilities**: $42,000
- Common stock: $5,040
- Retained earnings: $12,960
- **Total common equity**: $18,000
- **Total liabilities and equity**: $60,000

### Income Statement (Millions of $)
- The income statement section is not visible in this image.

**Explanation:**

The balance sheet provides a snapshot of Koski Inc.'s financial position as of 2018. It shows that the company's total assets equal its total liabilities and equity, both amounting to $60,000 million. The balance sheet is divided into assets, liabilities, and equity, demonstrating how the company's resources are financed.

- **Assets**: Comprised of current assets like cash, receivables, and inventories, along with non-current assets like net plant and equipment.
- **Liabilities**: Include current liabilities such as accounts payable, accruals, and notes payable, as well as long-term debt in the form of bonds.
- **Equity**: Represents shareholder's equity, including common stock and retained earnings, leading to a balance with total assets.

**Income Statement (Millions of $) for 2018**

- **Net sales:** $84,000
- **Operating costs except depreciation:** $78,120
- **Depreciation:** $1,680
- **Earnings before interest and taxes (EBIT):** $4,200
- **Less interest:** $900
- **Earnings before taxes (EBT):** $3,300
- **Taxes:** $1,320
- **Net income:** $1,980

**Other Data:**

- **Shares outstanding (millions):** 500.00
- **Common dividends (millions of $):** $693.00
- **Interest rate on notes payable & long-term bonds:** 6%
- **Federal plus state income tax rate:** 40%
- **Year-end stock price:** $47.52

**Question:**

Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.

- a. 45.45%
- b. 39.09%
- c. 44.09%
- d. 38.18%
- e. 39.55%

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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