FIN 365
GRADED
ASSIGNMENT 1
CHAPTERS 2, 7, 8,
9, 10, AND 11
, FIN 365 GRADED ASSIGNMENT 1
CHAPTERS 2, 7, 8, 9, 10, AND 11
40 WRITTEN QUESTIONS WORTH 2.5 POINTS EACH (YOU MUST SHOW YOUR WORK TO RECEIVE CREDIT)
SOLUTIONS
Chapter 7
1. Which of the following would, generally, indicate an improvement in a company's financial position,
holding other things constant?
a. The total assets turnover decreases.
b. The TIE declines.
c. The DSO increases.
d. The EBITDA coverage ratio increases.
2. 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.
3. Which of the following statements is CORRECT?
a. Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit
margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under
these conditions, the ROE will decrease.
b. Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its
profit margin rises from 9% to 10% and its debt increases from 40% of total assets to
60%. Under these conditions, the ROE will increase.
c. Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit
margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without
additional information, we cannot tell what will happen to the ROE.
d. The modified DuPont equation provides information about how operations affect the ROE,
but the equation does not include the effects of debt on the ROE.
RATIONALE: PM × TATO × Eq mult. = ROE
Old 9% 1.0 1.666667 15%
New 10% 0.9 2.5 23%
We see that b is true, thus c must be false. We can also see that d, e, and a are all false.
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, 4. Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates,
and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is
CORRECT?
a. Heidee would have the higher net income as shown on the income statement.
b. Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower
net income.
c. Heidee would have the lower equity multiplier for use in the DuPont equation.
d. Heidee would have the lower net income as shown on the income statement.
More debt would mean more interest, hence a lower NI, given a constant EBIT, so e is
RATIONALE: correct. Also, we can rule out b and a, and Heidee would also have the higher multiplier,
which rules out c. And with more interest, Heidee would have to pay less taxes, not more.
5. Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were
$195,000 and its net income was $10,549. The CFO believes that the company could have operated more
efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or
capital structure. Had it cut costs and increased its net income in this amount, by how much would the
ROE have changed?
a. 5.66%
b. 5.95%
c. 6.27%
d. 6.58%
RATIONALE: Old New
Sales $195,000 $195,000
Original net income $ 10,549 $ 10,549
Increase in net income $0 $ 5,250
New net income $ 10,549 $ 15,799
Profit margin 5.41% 8.10%
TATO 1.33 1.33
Equity multiplier 1.75 1.75
ROE 12.59% 18.86%
Change in ROE 6.27%
POINTS: 1
DIFFICULTY: Difficulty: Moderate
The following questions count for 5 questions worth
Exhibit 7.1
The balance sheet and income statement shown below are for Pettijohn 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 2015
Cash and securities $ 1,554.0
Accounts receivable 9,660.0
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