Question

5. Highly leveraged firms have higher ROE than lower leveraged firms. 6. All things equal, the higher a company's inventory turnover rate, the better. 7. All else being equal, a higher financial leverage will increase a company's debt rating and decrease the interest rate it must pay. 8. Vertical analysis examines changes in financial data across time. 9. A current ratio greater than 1.0 is generally desirable for a company. 10. Return on assets can be disaggregated into profit margin and an expense-to- sales ratio.

Answer 1

Answer is given below

5 Highly leveraged firms have higher ROE when there is profit. During lower profit ROE will be lower During lower profit time higher leveraged firms have high interest expense and hence profit will be lower Accordingly ROE also will decrease compared to leveraged firm 6 Higher inventory turnover rate will reduce the number of days of inventory on hand which is desirable Lower the inventory on hand lower working capital requirements 7 A higher financial leverage is riskier and will not lead to higher debt rating. A higher financial leverage also leads to higher interest expense 8 Vertical analysis does not compare financial data over a time period It takes the same year and keeps Total sales or Total Assets/Liabilities & Stockholders equity as base Horizontal analysis compares financial data over a time period 9 A Current ratio of 2.0 is desirable for the firm A Quick ratio of 1.0 is desirable for the firm 10 Return on assets can be disaggregated into = Profit margin X Asset turnover Profit margin = Net Income /Sales Asset turnover = Sales /Average Assets