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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 3

WORKING WITH FINANCIAL STATEMENTS - all with Video Answers

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Chapter Questions

Problem 1

What effect would the following actions have on a firm's current ratio? Assume that net working capital is positive.
a. Inventory is purchased.
b. A supplier is paid.
c. A short-term bank loan is repaid.
d. A long-term debt is paid off early.
e. A customer pays off a credit account.
f. Inventory is sold at cost.
g. Inventory is sold for a profit.

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03:37

Problem 2

In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?

Jennifer Stoner
Jennifer Stoner
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Problem 3

Explain what it means for a firm to have a current ratio equal to .50 . Would the firm be better off if the current ratio were 1.50 ? What if it were 15.0? Explain your answers.

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Problem 4

Fully explain the kind of information the following financial ratios provide about a firm:
a. Quick ratio.
b. Cash ratio.
c. Total asset turnover.
d. Equity multiplier.
e. Long-term debt ratio.
f. Times interest earned ratio.
g. Profit margin,
h. Return on assets.
i. Return on equity.
j. Price-earnings ratio.

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Problem 5

What types of information do common-size financial statements reveal about the firm? What is the best use for these common-size statements? What purpose do common-base year statements have? When would you use them?

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02:26

Problem 6

Explain what peer group analysis is. As a financial manager, how could you use the results of peer group analysis to evaluate the performance of your firm? How is a peer group different from an aspirant group?

Sirisa Reddy
Sirisa Reddy
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01:22

Problem 7

Why is the DuPont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to $\mathrm{ROE}$ considered by itself.

Ameer Said
Ameer Said
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Problem 8

Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every $$\$ 100$$ worth of chips shipped over some period, only $$\$ 93$$ worth of new orders were received. In November 2013, the semiconductor equipment industry's book-tobill ratio was 1.11 , compared to 1.05 during the month of October 2013. The book-to-bill ratio reached a recent low of .75 during October 2012 and a recent high of 1.23 during July 2010. The three-month average of worldwide bookings in November 2013 was $$\$ 1.24$$ billion, an increase of 10.1 percent from October 2013, while the threemonth average of billings was $$\$ 1.11$$ billion, a 4.0 percent decrease from October 2013. What is this ratio intended to measure? Why do you think it is so closely followed?

Leslie Deeb
Leslie Deeb
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00:30

Problem 9

So-called samestore sales are a very important measure for companies as diverse as McDonald's and Sears. As the name suggests, examining same-store sales means comparing revenues from the same stores or restaurants at two different points in time. Why might companies focus on same-store sales rather than total sales?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
02:09

Problem 10

There are many ways of using Page 85 standardized financial information beyond those discussed in this chapter. The usual goal is to put firms on an equal footing for comparison purposes. For example, for auto manufacturers, it is common to express sales, costs, and profits on a per-car basis. For each of the following industries, give an example of an actual company and discuss one or more potentially useful means of standardizing financial information:
a. Public utilities.
b. Large retailers.
c. Airlines.
d. Online services.
e. Hospitals.
f. College textbook publishers.

Marcus Esteban
Marcus Esteban
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Problem 11

In recent years, several manufacturing companies have reported the cash flow from the sale of Treasury securities in the cash from operations section of the statement of cash flows. What is the problem with this practice? Is there any situation in which this practice would be acceptable?

Rashmi Sinha
Rashmi Sinha
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03:06

Problem 12

Suppose a company lengthens the time it takes to pay suppliers. How would this affect the statement of cash flows? How sustainable is the change in cash flows from this practice?

Jennifer Stoner
Jennifer Stoner
Numerade Educator