Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 23, Problem 4PS
Summary Introduction
To determine: The higher probability of default.
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Compare the general trends of current liabilities for both companies. Which company do you think is in a better position?
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Which company fared better using the horizontal analysis?
Short-term creditors would probably most interested in which ratio? a. Current ratio c. Debt-to-equity ratio b. Earnings per share d. Quick ratio
Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken.
CAn you explain how to solve these not just the answers?
1. Issuance of long-term bonds
2. Issuance of short-term notes
3. Payment of accounts payable
4. Purchase of inventory on account
5. Purchase of inventory for cash
6. Purchase of equipment with a 4-year note
7. Retirement bonds
8. Sale of common stock
9. Write-off of obsolete inventory
10. Purchase of short-term investment for cash
11. Decision to refinance on a long-term basis some currently maturing debt
Chapter 23 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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- Dividing quick assets by current liabilities is the calculation for the a.ratio of liabilities to stockholders' equity. b.acid-test ratio. c.current ratio. d.return on investment.arrow_forwardWhich one of the following is a measure of long term solvency? A. Price earning ratio B. Profit margin C. Cash coverage ratio D. Receivables turnover E. Quick ratioarrow_forwardWhich one of the proportions of debt in the following chart is the optimal level? Firm Value Vu+ TD A B OD OC A B C -Vu + TD - Financial Distress Costs D Proportion of Debtarrow_forward
- What is the correct option?arrow_forwardWhich of the following is the correct explanation for the purpose of financial risk ratios? Select one: O a. They show the relative proportion of debt items with respect to shareholders' equity or total capital. b. They show the profitability of the company over a specific period of time. c. They show the probability of whether the company will face problems in operations. O d. They show the relative levels of liquid assets of the company.arrow_forwardDuPont system of analysis Use the following financial information for AT&T and Verizon to conduct a DuPont system of analysis for each company. Sales Earnings available for common stockholders Total assets Stockholders' equity a. Which company has the higher net profit margin? Higher asset turnover? b. Which company has the higher ROA? The higher ROE? c. Which company has the higher financial leverage multiplier? a. Net profit margin (Round to three decimal places.) AT&T Net profit margin AT&T $164,000 13,333 403,921 201,934 Verizon Verizon $126,280 13,608 244,280 24,232arrow_forward
- Comparing the extent of long-term debt to equity is an example of __________. Multiple Choice Pivottables Vertical analysis Horizontal analysis Ratio analysisarrow_forwardA general question about ratios: do you think that a ratio can be too high or too low? Why or why not? To help you focus start with the debt to equity and then the current ratio Think a little deeper - What does the Current ratio (or amount of Working Capital tell us)? Hint - what do we expect to happen to current assets and current liabilities?arrow_forwardThe ratio that measures how much an investor is willing to pay for a dollar of earnings is known as a _____________ ratio. A. asset management B. market value C. profitabilityarrow_forward
- Match each definition that follows with the term (a–h) it defines. Question 7 options: a company's ability to make interest payments and repay debt at maturity focuses on a company’s ability to generate net income useful for comparing one company to another or to industry averages use debt to increase the return on an investment measures the risk that interest payments will not be made if earnings decrease the percentage analysis of the relationship of each component in a financial statement to a total within the statement a percentage analysis of increases and decreases in related items on comparative financial statements an analysis of a company’s ability to pay its current liabilities 1. solvency 2. leverage 3. times interest earned 4. horizontal analysis 5. vertical analysis 6. common-sized financial statements 7. current position analysis 8.…arrow_forwardWhich of the following is NOT one of the ratios in Internal Liquidity group? Select one: O a. Quick ratio O b. Return on Equity O c. Receivables turnover ratio O d. Current ratioarrow_forwardCritically Discuss the two statements below. A. Ratio is an expression of relationship between two or more items in mathematical terms. Ratio may be expressed as a:b (a is to b), in terms of simple fraction, integer, or percentage. B. A Finance Manager can utilize financial ratios and completely analyse any firm's financial performance without the need for any further financial review via any other company's data.arrow_forward
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