QUESTION 17

You work for ABC Bank and are reviewing the financial statements for one of the banks customers under the terms of the line of credit facility. The credit facility requires the customer to maintain a debt-to-equity ratio of less than 1.0. During the year, the customers debt-to-equity ratio increased from 0.8 to 1.1, so you asked the customer to explain the reason for this change. Which of the following is the most plausible explanation for this result?

1. The company improved its cash collection practices

2. The company generated record profits this year

3. The company repurchased some of its own stock this year

4. The company refinanced a mortgage that came due during the year

Which of the following changes will NOT result in an increase in the magnitude of a firms trailing price-earnings (P/E) ratio?

1. An decrease in the firms earnings as the result of an unusual loss

2. The firms decision to adopt a more conservative accounting policy

3. An increase in the anticipated growth rate for the firms future earnings

4. An increase in the firms financial leverage (FLEV)