Question

1. Rosita's Resources paid $22,600 in interest and $16,500 in dividends last year. The firm’s EBIT is 55,000, EAT is $35,750, depreciation expense is $10,540, and the tax rate is 35 percent. What is the value of the cash coverage ratio? Is it more or less “safe” that a firm that has a cash coverage ratio of 2.5?

a. 2.90, more safe.

b. 2.90, less safe.

c. 2.05, more safe.

d. 2.05, less safe.

e. 2.43, less safe.

2. Five years ago Farmers, Inc., had a debt ratio (or debt-asset ratio) of 0.6. At that time the management decided notto take on any more debt and to grow only at its internal growth rate
of 8%. What is likely to have happened to the company’s debt ratio over the next five years as a result of this decision?

Increased

Decreased

Stayed the same

Increased for the first two years and decreased thereafter

Cannot be determined based on the following information

3. Tony V’s has sales of $833,587, a gross profit margin of 32.4 percent, and inventory of $178,435. What is the company's Days Sales in Inventory (Assume 365 day year)? Is this better or worse than its competitor that has 110 Days Sales in Inventory? (Hint:Need to first solve for the cost of goods sold)

78.13 days, better

78.13 days, worse

115.58 days, better

115.58 days, worse

241.14 days, worse

Answer 1

1.

Cash Conversion Ratio = (EBIT+Depreciation)/Interest Expense

Cash Conversion Ratio = (55000+10540)/22600

Cash Conversion Ratio = 2.9

It is safe to have Cash Conversion Ratio 2.9

Option A is correct.

2.

Here,

Debt/Equity = 0.6

Debt = 0.6

Equity = 1

Assets = 1.6

in 5 years,

Assets = 1.6(1.08)⁵

Assets = 2.35

Debt = 0.6

Equity = 2.35 - 0.6 = 1.75

Debt/Equity Ratio = 0.6/1.75

Debt/Equity Ratio = 0.34

So Debt to Equity ratio decreased

Option B is correct.

3.

Days Sales Inventory = (Inventory/COGS)365

COGS = (1 - 0.324)*833,587

COGS = 563505

Days Sales Inventory = (178435/563505)*365

Days Sales Inventory = 115.58 days

115.58 is worse than 110 days.

Option D is correct.