27 Questions
What does the current ratio (1.5) indicate about the company's liquidity?
The company may face cash problems despite having a strong current ratio.
What is the total equity of the company?
$50
What are the short-term debt obligations of the company?
$30
Which financial statement ratio does not provide information on the timing of cash flows?
Current ratio
What can be inferred about the company's working capital based on the text?
It is difficult to infer working capital based on the provided information.
What potential issue does the company face despite having a strong current ratio?
Excessive short-term debt
What effect does borrowing have on a firm's risk?
Borrowing increases a firm's financial risk
What is the impact of changes in EBIT on firm D's ROE?
It causes firm D's ROE to vary widely
What does ROE stand for in the context of the text?
Return on Equity
How is the Weighted Average Cost of Capital (WACC) calculated?
By adding the cost of debt and cost of equity
What does EVA stand for in the context of the text?
Economic Value Added
What is the purpose of the Invested Capital mentioned in the text?
To evaluate the company's total capital employed
What does the negative EVA imply?
Value destruction
Why is the growth of WCR concerning in this scenario?
It indicates inefficient management of working capital
What does the negative historical return spread imply?
Value destruction
Why is Mr. Bobson accused of overinvesting in working capital?
To raise profits and increase his bonus
What is the assumption made about management in the financial leverage table?
Management earns an operating profit of 10% on every dollar
What is the ROE before tax for Firm C in the financial leverage table?
8%
What is the leverage effect for Firm F in the financial leverage table?
positive
What is the interest amount for Firm B in the financial leverage table?
$50
What is the ROIC before tax for Firm E in the financial leverage table?
13%
What is the cost of debt for Firm F in the financial leverage table?
$64
What is the earnings before tax for Firm E in the financial leverage table?
$52
What is the invested capital for Firm D in the financial leverage table?
$1000 million
What is the assumption made about management in the effect of financing on profitability table?
Management earns an operating profit of 10% on every dollar.
What is the profitability of the firm with 20% Equity (F) in the effect of financing on profitability table?
2% ROICBT, -22% ROEBT
What is the profitability of the firm with 50% Equity (D) in the effect of financing on profitability table?
10% ROICBT, 12% ROEBT
Test your understanding of business risk, ROE variability, and the impact of leverage on a firm's financial risk. Explore how different levels of leverage can amplify the variability of ROE in response to changes in EBIT.
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