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? *

a. Return on assets (ROA) will decline.

b. The times interest earned ratio (TIE) will increase.

c. Taxes paid will decline.

d. Statements a and c are correct.

e. None of the statements above is correct.

15. Companies A and B have the same profit margin and debt ratio. However, Company A has a higher return on assets and a higher return on equity than Company B. Which of the following can explain these observed ratios? *

a. Company A must have a higher total assets turnover than Company B.

b. Company A must have a higher equity multiplier than Company B.

c. Company A must have a higher current ratio than Company B.

d. Statements b and c are correct.

e. All of the statements above are correct.

16. You observe that a firm’s profit margin is below the industry average, while its return on equity and debt ratio exceed the industry average. What can you conclude? *

a. Return on assets must be above the industry average.

b. Total assets turnover must be above the industry average.

c. Total assets turnover must be below the industry average.

d. Statements a and b are correct.

e. None of the statements above is correct.

17. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm’s ROA? *

a. 8.4%

b. 10.9%

c. 12.0%

d. 13.3%

e. None of the above

18. Viera Company has $500,000 in total assets. The company’s basic earning power (BEP) is 10 percent, its times interest earned (TIE) ratio is 5, and the company’s tax rate is 40 percent. What is the company’s return on assets (ROA)? *

a. 3.2%

b. 4.0%

c. 4.8%

d. 6.0%

e. None of the above