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1Homework #3, Chapter 2 Fingame Course Spring 2016 True or False 1) Return on assets can be calculated as profit margin times asset turnover. True False 2) All else equal, a firm would prefer to have a higher gross margin. True False Multiple Choice Questions: 3) Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? a) The total asset turnover rate increased. c) The inventory turnover rate increased. e) The collection period decreased. b) The days' sales in receivables increased. d) The fixed asset turnover decreased. f) Other, specify. 4) Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan? a) current ratio d) times-burden-covered ratio b) debt-to-equity ratio c) times-interest-earned ratio e) None of the above. 5) On a common-size balance sheet, all accounts are expressed as a percentage of: a) sales. b) profits. c) equity. d) total assets. e) None of the above. 6) Which one of the following statements is correct? a) If the debt-to-assets ratio is greater than 0.50, then the debt-to-equity ratio must be less than 1.0. b) Long-term creditors would prefer the times-interest-earned ratio be 1.4 rather than 1.5. c) The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio. d) To realize the best risk and reward profile, financial leverage should be maximized. e) None of the above. 7) Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5 and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, of which half is in cash and marketable securities. Assume that Primavera earns a 3 percent after-tax return on cash and securities. What would Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders? a) Negative d) Between 40% and 60% b) Between 0% and 20% c) Between 20% and 40% e) Greater than 60% f) Other, specify. 8) Answer the questions below based on the following information. The tax rate is 35% and all dollars are in millions. Assume that the companies have no liabilities other than the debt shown below. a) Calculate each company's ROE, ROA, and ROIC. b) Why is Runrun's ROE so much higher than Suunto's? Does this mean Runrun is a better company? Why or why not? c) Why is Suunto's ROA higher than Runrun's? What does this tell you about the two companies? d) How do the two companies' ROICs compare? What does this suggest about the two companies? The financial statements for Limited Brands, Inc. follow (fiscal years ending January): 9) Please refer to Limited Brands Inc.'s financial statements above. Use the company's operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. For the fiscal years ending in January of 2006 and 2007, calculate: a) Debt-to-equity ratio b) Times-interest-earned ratio c) Times burden covered 10) Please refer to Limited Brands Inc.'s financial statements above. Use the company's operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years ending in January 2006 and 2007 before failing to cover: a) Interest and principal repayment requirements? b) Interest, principal, and common dividend payments? 11) Please refer to Limited Brands Inc.'s financial statements above. Prepare common-size financial statements for Limited Brands, Inc. for 2006 - 2007