Q&A Hero

Q: The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal. a. True b. False

Q: When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years. a. True b. False

Q: When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years. a. True b. False

Q: What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%? a. $8,509 b. $8,957 c. $9,428 d. $9,924 e. $10,446

Q: Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity? a. $225,367 b. $237,229 c. $249,090 d. $261,545 e. $274,622

Q: A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it? a. $284,595 b. $299,574 c. $314,553 d. $330,281 e. $346,795

Q: Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today? a. $1,063,968 b. $1,119,966 c. $1,178,912 d. $1,240,960 e. $1,303,008

Q: Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today? a. $825,835 b. $869,300 c. $915,052 d. $963,213 e. $1,011,374

Q: Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years. He could earn 4.5% on his money in other investments with equal risk. What is the most he should pay for the annuity? a. 20,701 b. $21,791 c. $22,938 d. $24,085 e. $25,289

Q: A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $1,412.84 b. $1,487.20 c. $1,565.48 d. $1,643.75 e. $1,725.94

Q: What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%? a. $11,262.88 b. $11,826.02 c. $12,417.32 d. $13,038.19 e. $13,690.10

Q: An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost him to buy such an annuity today? a. $574,924 b. $605,183 c. $635,442 d. $667,214 e. $700,575

Q: After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $50,753 b. $53,424 c. $56,236 d. $59,195 e. $62,311

Q: Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $5,493.71 b. $5,782.85 c. $6,087.21 d. $6,407.59 e. $6,744.83

Q: What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%? a. $16,806 b. $17,690 c. $18,621 d. $19,601 e. $20,633

Q: You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? a. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. b. A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ. c. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. d. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. e. The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

Q: All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases. a. True b. False

Q: Scott and Linda have been saving to pay for their daughter Casie's college education. Casie just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years⎯if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, Scott and Linda have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Casie's anticipated college costs? a. $1,965.21 b. $2,068.64 c. $2,177.51 d. $2,292.12 e. $2,412.76

Q: Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living? a. $65,632 b. $72,925 c. $81,027 d. $89,130 e. $98,043

Q: You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target? a. $3,008 b. $3,342 c. $3,676 d. $4,044 e. $4,448

Q: A "growing annuity" is any cash flow stream that grows over time. a. True b. False

Q: A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods. a. True b. False

Q: Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks? a. 1.56% b. 1.30% c. 1.09% d. 0.91% e. 0.72%

Q: You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now? a. $15,234.08 b. $16,035.88 c. $16,837.67 d. $17,679.55 e. $18,563.53

Q: Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate? a. 15.27% b. 16.08% c. 16.88% d. 17.72% e. 18.61%

Q: Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay? a. 3.72% b. 4.13% c. 4.59% d. 5.05% e. 5.56%

Q: Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan? a. 8.46% b. 8.90% c. 9.37% d. 9.86% e. 10.38%

Q: Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan? a. 8.24% b. 8.45% c. 8.66% d. 8.88% e. 9.10%

Q: Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern? a. 0.52% b. 0.44% c. 0.36% d. 0.30% e. 0.24%

Q: American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%? a. 18.58% b. 19.56% c. 20.54% d. 21.57% e. 22.65%

Q: What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly? a. $969 b. $1,020 c. $1,074 d. $1,131 e. $1,187

Q: What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly? a. $1,537.69 b. $1,618.62 c. $1,699.55 d. $1,784.53 e. $1,873.76

Q: You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest? a. Bank 1; 6.1% with annual compounding. b. Bank 2; 6.0% with monthly compounding. c. Bank 3; 6.0% with annual compounding. d. Bank 4; 6.0% with quarterly compounding. e. Bank 5; 6.0% with daily (365-day) compounding.

Q: Which of the following bank accounts has the lowest effective annual return? a. An account that pays 8% nominal interest with daily (365-day) compounding. b. An account that pays 8% nominal interest with monthly compounding. c. An account that pays 8% nominal interest with annual compounding. d. An account that pays 7% nominal interest with daily (365-day) compounding. e. An account that pays 7% nominal interest with monthly compounding.

Q: Which of the following bank accounts has the highest effective annual return? a. An account that pays 8% nominal interest with daily (365-day) compounding. b. An account that pays 8% nominal interest with monthly compounding. c. An account that pays 8% nominal interest with annual compounding. d. An account that pays 7% nominal interest with daily (365-day) compounding. e. An account that pays 7% nominal interest with monthly compounding.

Q: Which of the following statements is CORRECT? a. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. b. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. c. If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%. d. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. e. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Q: Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant? a. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. b. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. c. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. d. A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. e. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

Q: A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT? a. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity. b. The periodic interest rate is greater than 3%. c. The periodic rate is less than 3%. d. The present value would be greater if the lump sum were discounted back for more periods. e. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

Q: Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero. a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). b. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). d. Investment D pays $2,500 at the end of 10 years (just one payment). e. Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Q: At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero. a. Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). b. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). d. Investment D pays $2,500 at the end of 10 years (just one payment). e. Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Q: Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a. The periodic rate of interest is 8% and the effective rate of interest is also 8%. b. The periodic rate of interest is 2% and the effective rate of interest is 4%. c. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. d. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. e. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Q: Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a. The periodic rate of interest is 5% and the effective rate of interest is also 5%. b. The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. c. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. e. The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

Q: As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan). a. True b. False

Q: If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year. a. True b. False

Q: If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate. a. True b. False

Q: If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate. a. True b. False

Q: Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today? a. $2,819.52 b. $2,967.92 c. $3,116.31 d. $3,272.13 e. $3,435.74

Q: The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today? a. $1,928.78 b. $2,030.30 c. $2,131.81 d. $2,238.40 e. $2,350.32

Q: 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 2016 Cash and securities $ 1,554.0 Accounts receivable 9,660.0 Inventories 13,440.0 Total current assets $24,654.0 Net plant and equipment 17,346.0 Total assets $42,000.0 Liabilities and Equity Accounts payable $ 7,980.0 Notes payable 5,880.0 Accruals 4,620.0 Total current liabilities $18,480.0 Long-term bonds 10,920.0 Total liabilities $29,400.0 Common stock 3,360.0 Retained earnings 9,240.0 Total common equity $12,600.0 Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016 Net sales $58,800.0 Operating costs except depr'n $55,274.0 Depreciation $ 1,029.0 Earnings bef int and taxes (EBIT) $ 2,497.0 Less interest 1,050.0 Earnings before taxes (EBT) $ 1,447.0 Taxes $ 314.0 Net income $ 1,133.0 Other data: Shares outstanding (millions) 175.00 Common dividends $ 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69 Refer to the data for Pettijohn Inc. What is the firm's equity multiplier? a. 3.33 b. 3.50 c. 3.68 d. 3.86 e. 4.05

Q: If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667. a. True b. False

Q: Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. a. True b. False

Q: Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time. a. True b. False

Q: Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects. a. True b. False

Q: LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?a. 7.57%b. 7.95%c. 8.35%d. 8.76%e. 9.20%

Q: An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?a. $52,230b. $54,979c. $57,873d. $60,919e. $64,125

Q: Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?a. 16.87%b. 17.75%c. 18.69%d. 19.67%e. 20.66%

Q: Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP)?a. 18.49%b. 19.47%c. 20.49%d. 21.52%e. 22.59%

Q: Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?a. 7.22%b. 7.58%c. 7.96%d. 8.36%e. 8.78%

Q: Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?a. 6.49%b. 6.83%c. 7.19%d. 7.55%e. 7.92%

Q: Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?a. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.b. Given this information, Leaudy must have the higher ROE.c. Company Leaudy has a higher basic earning power ratio (BEP).d. Company Heidee has a higher basic earning power ratio (BEP).e. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

Q: Which of the following statements is CORRECT?a. An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.b. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.c. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.d. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.e. An increase in the DSO, other things held constant, could be expected to increase the ROE.

Q: Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?a. The times interest earned ratio will decrease.b. The ROA will decline.c. Taxable income will decrease.d. The tax bill will increase.e. Net income will decrease.

Q: Which of the following would indicate an improvement in a company's financial position, holding other things constant?a. The current and quick ratios both increase.b. The inventory and total assets turnover ratios both decline.c. The debt ratio increases.d. The profit margin declines.e. The EBITDA coverage ratio declines.

Q: If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.a. The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.b. The division's basic earning power ratio is above the average of other firms in its industry.c. The division's total assets turnover ratio is below the average for other firms in its industry.d. The division's debt ratio is above the average for other firms in the industry.e. The division's inventory turnover is 6, whereas the average for its competitors is 8.

Q: A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?a. Increase inventories while holding sales and cost of goods sold constant.b. Increase accounts receivable while holding sales constant.c. Increase EBIT while holding sales constant.d. Increase accounts payable while holding sales constant.e. Increase notes payable while holding sales constant.

Q: Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio. a. True b. False

Q: Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA. a. True b. False

Q: The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects. a. True b. False

Q: Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results. a. True b. False

Q: Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?a. 7.32b. 7.70c. 8.09d. 8.49e. 8.92

Q: A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a. 47.33%b. 49.82%c. 52.45%d. 55.21%e. 58.11%

Q: Bostian, Inc. has total assets of $625,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?a. $158,750b. $166,688c. $175,022d. $183,773e. $192,962

Q: Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?a. 4.72b. 4.97c. 5.23d. 5.51e. 5.80

Q: Hutchinson Corporation has zero debt⎯it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?a. $155,800b. $164,000c. $172,200d. $180,810e. $189,851

Q: Which of the following statements is CORRECT?a. If two firms differ only in their use of debt⎯i.e., they have identical assets, sales, operating costs, and tax rates⎯but 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 debt⎯i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates⎯but 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.

Q: If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?a. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.b. The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.c. Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.d. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.e. The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Q: Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. a. True b. False

Q: The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations. a. True b. False

Q: 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. a. True b. False

Q: It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. a. True b. False