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6. Stennett Corp.’s CFO has proposed that the company issue new debt and use the proceeds to buy back common stock.  Which of the following are likely to occur if this proposal is adopted?  (Assume that the proposal would have no effect on the company’s operating income.)

a.Return on assets (ROA) will decline.

b.The Depreciation will increase.

c.Taxes paid will decline.

d.Statements a and c are correct.  *

7.Bedford Hotels and Breezewood Hotels both have $100 million in total assets and a 10 percent return on assets (ROA).  Each company has a 40 percent tax rate.  Bedford, however, has a higher debt ratio and higher interest expense.  Which of the following statements is most correct?

a.The two companies have the same return on equity (ROE).  

b.Bedford has a higher return on equity (ROE).  *

c.Bedford has a lower level of operating income (EBIT).

d.Statements a and b are correct.

8.Company J and Company K each recently reported the same earnings per share (EPS).  Company J’s stock, however, trades at a higher price. Which of the following statements is most correct?

a.Company J must have a higher P/E ratio.  *

b.Company J must have a higher market to book ratio.

c.Company J must be riskier.

d.Company J must have fewer growth opportunities.

9.   As a short-term creditor concerned with a company’s ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer?

 Current         Debt

ratio    TIE     ratio

a.0.8         1.3      0.3

b.1.2       1.2      0.8

c.1.7       1.2      0.8   

d.2.0       1.3      0.55  *

10. Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent.  The company recently reported that its basic earning power (BEP) ratio was 15 percent and its return on assets (ROA) was 9 percent.  What was the company’s interest expense?

a.$         0  *

b.$ 2,000,000

c.$ 6,000,000


11.  You are given the following information:  Stockholders’ equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5.  Calculate the market price of a share of the company’s stock.

a.$ 33.33

b.$ 75.00  *

c.$ 10.00

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