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a. Typically, a firm’s DPS should exceed its EPS. b. Typically, a firm’s EBIT should exceed its EBITDA. c. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. b. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. e. The statement of cash flows shows how much the firm’s cash–the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)–increased or decreased during a given year. a. Dividends paid reduce the net income that is reported on a company’s income statement. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. c. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year. d. Accounts receivable are reported as a current liability on the balance sheet. e. If a company pays more in dividends than it generates in net income, its retained. earnings as reported on the balance sheet will decline from the previous year’s balance. a. The company repurchased some of its common stock. b. The company dramatically increased its capital expenditures. c. The company retired a large amount of its long-term debt. d. The company sold some of its fixed assets. e. The company had high depreciation expenses To answer this question, you must first calculate net income (which begins with EBITDA, or sales minus operating expense in this case), then subtract interest paid (5% of the debt) and depreciation (this will give you Earnings Before Tax or EBT), and then taxes of 35% on EBT. Next, you will have to calculate Free Cash Flow (FCF), which is Net Operating Income After Tax, which begins with EBIT multiplied by (1-.35), but then you add depreciation, and then subtract the two investments (in working capital and in fixed assets). a. $673.27 b. $708.70 c. $746.00 d. $783.30 e. $822.47 a. The ratio of long-term debt to total capital is more likel

y to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. d. An increase in the DSO, other things held constant, could be expected to increase the ROE. e. 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. a. Company HD has a lower equity multiplier. b. Company HD has more net income. c. Company HD pays more in taxes. d. Company HD has a lower ROE. e. Company HD has a lower times interest earned (TIE) ratio. a. Given this information, LD must have the higher ROE. b. Company LD has a higher basic earning power ratio (BEP). c. Company HD has a higher basic earning power ratio (BEP). d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE. e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE. Cash                  $ 14,000                         Accounts payable                                 $   42,000 Receivables            70,000                        Other current liabilities                              28,000 Inventories            210,000                         Total CL                                                $ 70,000 Total CA              $294,000                         Long-term debt                                       70,000 Net fixed assets   126,000                          Common equity                                     280,000 Total assets        $420,000                         Total liab. and equity                           $420,000 Sales                  $280,000 Net income          $ 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change? a. 4.28% b. 4.50% c. 4.73% d. 4.96% e. 5.21% a. 3.83% b. 4.02% c. 4.22% d. 4.43% e. 4.65%