Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors’ capit
Posted: Wed May 18, 2022 9:31 pm
Firms U and L each have the same amount of assets,
investor-supplied capital, and both have a return on investors’
capital (ROIC) of 12%. Firm U is unleveraged, i.e., it is 100%
equity financed, while Firm L is financed with 50% debt and 50%
equity. Firm L's debt has an after-tax cost of 8%. Both firms have
positive net income and a 35% tax rate. Which of the following
statements is CORRECT?
a. The two companies
have the same times interest earned (TIE) ratio.
b. Firm L has a lower
ROA than Firm U.
c. Firm L has a lower
ROE than Firm U.
d. Firm L has the
higher times interest earned (TIE) ratio.
e. Firm L has a higher
EBIT than Firm U.
Which of the following statements is CORRECT?
a. Any forecast of
financial requirements involves determining how much money the firm
will need, and this need is determined by adding together increases
in assets and spontaneous liabilities and then subtracting
operating income.
b. The AFN equation for
forecasting funds requirements requires only a forecast of the
firm’s balance sheet. Although a forecasted income statement may
help clarify the results, income statement data are not essential
because funds needed relate only to the balance sheet.
c. Dividends are paid
with cash taken from the accumulated retained earnings account,
hence dividend policy does not affect the AFN forecast.
d. A negative AFN
indicates that retained earnings and spontaneous capital are far
more than sufficient to finance the additional assets needed.
e. If assets and
spontaneously generated liabilities are not projected to grow at
the same rate as sales, then the AFN method will provide more
accurate forecasts than the projected financial statement
method.
investor-supplied capital, and both have a return on investors’
capital (ROIC) of 12%. Firm U is unleveraged, i.e., it is 100%
equity financed, while Firm L is financed with 50% debt and 50%
equity. Firm L's debt has an after-tax cost of 8%. Both firms have
positive net income and a 35% tax rate. Which of the following
statements is CORRECT?
a. The two companies
have the same times interest earned (TIE) ratio.
b. Firm L has a lower
ROA than Firm U.
c. Firm L has a lower
ROE than Firm U.
d. Firm L has the
higher times interest earned (TIE) ratio.
e. Firm L has a higher
EBIT than Firm U.
Which of the following statements is CORRECT?
a. Any forecast of
financial requirements involves determining how much money the firm
will need, and this need is determined by adding together increases
in assets and spontaneous liabilities and then subtracting
operating income.
b. The AFN equation for
forecasting funds requirements requires only a forecast of the
firm’s balance sheet. Although a forecasted income statement may
help clarify the results, income statement data are not essential
because funds needed relate only to the balance sheet.
c. Dividends are paid
with cash taken from the accumulated retained earnings account,
hence dividend policy does not affect the AFN forecast.
d. A negative AFN
indicates that retained earnings and spontaneous capital are far
more than sufficient to finance the additional assets needed.
e. If assets and
spontaneously generated liabilities are not projected to grow at
the same rate as sales, then the AFN method will provide more
accurate forecasts than the projected financial statement
method.