Deck 5: Risk Analysis

Question 1

Which of the following ratios is not a measure of long-term solvency risk?

A) Debt /Equity Ratio
B) Interest Coverage Ratio
C) Operating Cash Flows to Current Liabilities Ratio
D) Liabilities to Assets Ratio

Answer 1

C

Question 2

Market equity beta measures the covariability of a firm's returns with the returns of:

A) all industry competitors in the market.
B) risk free securities.
C) all securities in the market.
D) all firms of comparable market value.

Answer 2

C

Question 3

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is:

A) 7.46
B) 11.83
C) 6.16
D) 5.62

Answer 3

6.16

Question 4

Doran Corp.has a current ratio of 6.Under which of the following scenarios might this indicate a problem?

A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Doran Corp.operates is experiencing a recession

Question 5

The Johnson Company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?

A) greater than 1.45
B) 1.45
C) less than 1.45
D) unable to determine without more information

Question 6

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to:

A) pay off accounts payable prior to year-end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.

Question 7

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?

A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors

Question 8

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be:

A) 54.36 days
B) 75.36 days
C) 102.94 days
D) 5.27 days

Question 9

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's current ratio in 2010 was:

A) 1.07
B) 1.45
C) 1
D) .69

Question 10

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?

A) Firms credit history
B) financial position of the firms creditors
C) firms cash flow
D) a and c

Question 11

Which of the following is not one of the three explanatory variables that determine a firm's market beta?

A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.

Question 12

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

A) failing to make a required interest payment on time
B) paying an accounts payable after the billing date
C) restructuring debt
D) defaulting on a principal payment on debt

Question 13

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about:

A) specific ratios that are important.
B) the amount of Type I and Type II errors.
C) which specific company will go bankrupt.
D) the relative importance of individual financial statement ratios.

Question 14

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was:

A) 43.20 days
B) 40.50 days
C) 45.25 days
D) 8.50 days

Question 15

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's quick ratio changed by what percentage from 2009 to 2010?

A) 30%
B) 107%
C) 25%
D) 82%

Question 16

Here are several ratios calculated from Midas Company's financial statements:
Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?

A) 39 days
B) 36 days
C) 56 days
D) 26 days

Question 17

Economic theory teaches that differences in market returns must relate to differences in:

A) book value
B) perceived risk
C) price-earnings ratio
D) bankruptcy risk

Question 18

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

A) Sales
B) Earnings
C) Positive cash flows
D) Income from continuing operations

Question 19

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was:

A) .70
B) 1.39
C) 1.00
D) .72

Question 20

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
$\begin{array}{lcc}\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\\\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \\\text { Accounts Receivable (net) } & 490,816 & 665,828 \\\text { Inventories } & 338,599 & 487,505 \\\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\\\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\\\\\text {Current Liabilities }\\\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \\\text { Current portion of long-term debt } & 182,295 & 210,090 \\\text { Accounts payable } & 296,307 & 334,247 \\\text { Accrued liabilities } & 941,912 & 743,999 \\\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\\\text { Total Current Liabilities }&1.648753&566237\\\end{array}$


$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}\begin{array}{l}\text { Net Sales } &\$ 4,885,340\\\text { Cost of Goods Sold }&2,542,35 \\\text { Operating Income } &733,54 \\\text { Net Income }&230,10\end{array}\\\begin{array}{r}\end{array}\end{array}$

$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}\begin{array}{l}\text { Cash Flows from Operations } &\$ 1.156,08\\\end{array}\\\begin{array}{r}\end{array}\end{array}$

-Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is:

A) 7.53 days
B) 48.09 days
C) 45.51 days
D) 50 days

Question 21

All of the following are common domestic risks faced by companies except:

A) recessions
B) technology
C) inflation
D) demographic shifts

Question 22

Short-term ____________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.

Question 23

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Long-term Debt to Long-Term Capital ratio is:

A) 31.4%
B) 29.4%
C) 34.0%
D) 25.4%

Question 24

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in investing?
Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 25

All of the following are common industry risks faced by companies except:

A) litigation
B) technology
C) regulation
D) competition

Question 26

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Liabilities to Shareholders' Equity ratio is:

A) 100.0%
B) 170.9%
C) 63.1%
D) 129.3%

Question 27

Changes in foreign exchange rates can affect a firm in all of the following ways except:

A) The prices a firm pays to acquire raw materials from suppliers abroad.
B) The amount of cash a firm receives when it collects an account receivable, a loan
Receivable, or another receivable denominated in a currency other than its own.
C) The value of domestic liabilities with fixed interest rates.
D) The prices a firm charges for products sold to customers abroad.

Question 28

All of the following are common international risks faced by companies except:

A) asset expropriation
B) exchange rate changes
C) political unrest
D) dependence on one or a few suppliers

Question 29

All of the following typically drive firm-specific risks except:

A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts

Question 30

Below is selected information from Marker's 2012 financial statements:

Marker's Liabilities to Assets Ratio for 2012 is:

A) 105.1%
B) 63.1%
C) 78.3%
D) 100.0%

Question 31

Which of the following can companies use as collateral for a loan?

A) prepaid insurance
B) prepaid rent
C) property, plant, and equipment
D) retained earnings

Question 32

Changes in interest rates can typically affect firms in all of the following ways except:

A) The value of investments in bonds or other investment securities with fixed interest
Rates.
B) The value of liabilities with fixed interest rates.
C) The returns a firm generates from pension fund investments.
D) The cash-equivalent value of assets invested abroad.

Question 33

Long-term ______________________________ represents the longer-term ability of the firm to generate cash internally or from external sources to satisfy plant capacity and debt repayment needs.

Question 34

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations?
Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 35

Below are various states of financial distres s:
1)defaulting on a principal payment on debt
2)restructuring debt
3)liquidating a firm
4)filing for bankruptcy
5)failing to make a required interest payment on time
What is the order of increasing gravity that analysts typically consider when assessing credit risk and bankruptcy risk according to a continuum of financial distress?

A) 5, 1, 2, 3, 4
B) 5, 2, 1, 4, 3
C) 1, 5, 2, 4, 3
D) 1, 5, 2, 3, 4

Question 36

The quick acid test ratio contains all of the following except:

A) cash
B) accounts receivable
C) marketable securities
D) prepaid assets

Question 37

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in financing?
Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 38

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Interest Coverage ratio is:

A) 7.66
B) 1.00
C) 11.35
D) 4.35

Question 39

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Long-term Debt to Shareholders' Equity ratio is:

A) 31.4%
B) 29.4%
C) 34.0%
D) 45.8%

Question 40

The source of risk related to political unrest and exchange rate changes are _________________________.

Question 41

When the excess of ROA over the after-tax cost of borrowing declines,additional ________________________________________ begins to reduce the return to common shareholders.

Question 42

In general,the shorter the number of days of needed financing,the ____________________ is the cash flow from operations to average current liabilities.

Question 43

The source of risk related to interest rate changes and demographic changes is ____________________.

Question 44

Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.

Question 45

The operating cycle must not only generate cash to supply ________________________________________ needs,it must generate sufficient cash to service debt.

Question 46

The source of risk related to technology,regulation and availability of raw materials is ____________________.

Question 47

One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.

Question 48

When calculating the quick ratio,an analyst would include in the numerator cash,________________________________________,and receivables.

Question 49

The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.

Question 50

An analyst can view the revenues to cash ratio as a(n)______________________________________.

Question 51

The analysis of short-term liquidity risk requires an understanding of the _________________________ of a firm.

Question 52

Common shareholders benefit with increasing proportions of debt in the capital structure as long as the firm maintains an excess of ____________________ over the after-tax cost of debt

Question 53

By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.

Question 54

The source of risk related to management competence,strategic direction and lawsuits is _________________________.

Question 55

The beta coefficient measures the ____________________ of a firm's returns with those of all shares traded in the market (in excess of the risk-free interest rate).

Question 56

_________________________ concerns a firm's ability to make interest and principal payments on borrowings as they become due.

Question 57

Financially healthy firms frequently close any cash flow gaps in their operating cycles with ________________________________________.

Question 58

The current ratio is one of the measures of the __________ of the firm.

Question 59

When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called ______________________________.

Question 60

Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.

Question 61

When a company wants to calculate the current ratio they would divide the current assets by the ___________

Question 62

A.What are the three measures that are used to analyze long-term solvency risk?
B.describe each measure briefly

Question 63

The main ratio used by many financial analysts to examine a company's short-term liquidity risk is the current ratio.However,there are a number of problems that arise when this ratio is used to examine short-term liquidity risk that may make the current ratio less useful than initially thought.Discuss the interpretative problems of using the current ratio.

Question 64

Falcon Corporation has current assets of $400,000 and current liabilities of $275,000.
Required:
Compute the effect of each of the following transactions on Falcon's current ratio:
a.Refinanced a $60,000 long-term mortgage with a short-term note.
b.Purchasing $108,000 of merchandise inventory with short-term accounts payable.
c.Paying $50,000 of short-term accounts payable.
d.Collecting $90,000 of short-term accounts receivable.

Question 65

On January 1,2012,Deputron Company's beginning inventory was $600,000.During 2012,the company purchased $2,600,000 of additional inventory,and on December 31,2012 Creek's ending inventory was $565,000.
Required:
What was Deputron's inventory turnover for 2012? 

Question 66

Caraway Company's net accounts receivable was $300,000 at December 31,2012 and $450,000 at December 31,2013.Net cash sales for 2008 were $425,000.The accounts receivable turnover for 2013 was 7.0,and this turnover figure was computed from net credit sales for the year.
Required:
What were Caraway's total net sales for 2013? 

Question 67

Refer to the financial statement data for Patriot Corp.for 2011 and 2010.Complete the table by computing the ratios.


Financial Ratio to be calculated:

Question 68

Below is selected data of Pronto Company:

Required:
a.What is the accounts receivable turnover for 2012?
b.What is the inventory turnover for 2012? 

Question 69

Below is information from Darren Company's 2012 financial statements.

Using this information,calculate the following ratios:

Question 70

One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator.Detail how the interest coverage ratio and fixed charges coverage ratio are calculated.In addition,discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.

Question 71

The current risk-free rate of return in the economy is 6%.In addition,the market rate of return is currently 8.5%.
A.Given this information,what would be the expected return on common stock for a company with a systemic risk level (Beta) of 1.3? Show your calculations.
B.Describe systemic risk.

Question 72

Working capital is defined as ______________________ minus _____________________.

Question 73

For each of the following scenarios,determine if it is an indicator of potential cash flow problems:
Potential future cash
flow problems
Yes/No
a.Growth in accounts receivable or inventories that is less the growth rate in sales.
b.Increases in accounts payable that exceed the increase in inventories.
c.Capital expenditures that substantially exceed cash flow from operations.
d.Sales of marketable securities are less than purchases of marketable securities.
e.Other operating current liabilities that grow at a lesser rate than sales.
f.A reduction or elimination of dividend payments
g.A substantial shift from long-term borrowing to short-term borrowing.

Question 74

A.Hammer Corporation wrote off $185,000 of obsolete inventory at December 31,2011.
Required:
What effect did this write-off have on the company's 2011 current and quick ratios?
B.Assume that Hammer Company did not write off their inventory.How will this affect the company's financial position?

Question 75

Bragdon Company is consistently profitable.Its normal financial statement relationships are as follows:

Required: Determine whether each transaction or event that follows increased,decreased or had no effect on each ratio.
1.Bragdon declared but did not pay a cash dividend.
2.Customers returned invoiced goods for which they had not paid.
3.Accounts payable were paid at year-end.
4.Bragdon recorded both a receivable from an insurance company and a loss on a building due to fire damage.
5.Early in the year,Bragdon increased the selling price of one of its products because customer demand far exceeded production capacity.The number of units sold this year was the same as last year.

Question 76

Foxmoor Company's merchandise inventory and other related accounts for 2012 follow:

Required:
Calculate Foxmoor's inventory turnover during 2012 assuming that the merchandise inventory buildup was relatively constant during the year. 

Question 77

Given the following information,calculate for Year 2 the number of days of working capital financing the firm will need to obtain from other sources?

Question 78

Bankruptcy analysis research has gone through many iterations,from univariate bankruptcy prediction models to sophisticated logit models.However,after examining the results of the research there appear to be a number of common factors that consistently explain bankruptcy.These factors can be grouped into investment factors,financing factors,operating factors.For each of the three groups discuss specific factors that have been found to significantly explain bankruptcy.

Question 79

Selected risk ratios are presented for 2011 and 2010 for Techtron Company.Also,refer to the financial statement data for the company.

Financial Statements



Required:
a.Calculate the amounts of these ratios for 2012.
b.Assess the changes in the short-term liquidity risk of Techtron between 2010 and
2012 and the level of that risk at the end of 2012.
c.Assess the changes in the long-term solvency risk of Techtron between 2010 and
2012 and the level of that risk at the end of 2012.

Question 80

When a financial analyst examines the credit risk of a company,it is common that he or she uses a set of factors that all begin with the letter "C." Each factor provides a consideration that enters into the lending decision.List and discuss how each of the factors affects a company's credit risk.