7. If a firm\'s net sales (i.e., revenue) increases, but total assets, its debt

Question

7. If a firm's net sales (i.e., revenue) increases, but total assets, its debt ratio, and its net profit margin and remain the same as they were before net sales increased, the firm's a. ROE would not change b. ROE could either increase or decrease depending on the interaction between the equity multiplier and c. d. e. the days payable ratio ROE would increase ROE would decrease There is insufficient information to determine the effect on ROE. 8. Which of the following steps is most likely to decrease a company's cash conversion cycle (assume that none of the following actions has any impact on sales or COGS)? Note: there more be more than one answer for this questions - record the letter of all that apply (this is an all or nothing answer) a. Change its receivables policy from net 45 to net 35 (note that this action will decrease the firm's average collection period from 45 days to 35 days) b. Change its payables policy to pay bills in 30 days instead of in 40 days Decrease the inventory conversion period from 50 days to 40 days d. c. Reduce the firm's notes payable (i.e., bank loan) balance by 20% e. None of the actions listed above will decrease the firm's cash conversion cycle Which of the following actions would decrease the current ratio (assuming an initial current ratio of 0.8, and current liabilities equal to $1,000,000)? a. Borow $100,000 in short term debt and deposit this money (i.e., $100,000) into the firm's cash account b. Borrow $200,000 in long-term debt to buy $200,000 worth of additional inventory c. Borrow $50,000 of short-term debt and use the proceeds to pay all operating expenses sooner, thus 9. lowering accruals (i.e., accrued expenses) by $50,000 d. Sell $250,000 of fixed assets to pay off an equal amount of long-term debt e. None of the above that is, none of the actions listed about will decrease the current ratio

Explanation / Answer

7-

A

ROE WILL NOT CHANGE

ROE = NET INCOME/SALES*(SALES/TOTAL ASSETS)*(TOTAL ASSETS/AVERAGE SHAREHOLDERS EQUITY)

So change is sales would be offset if other variables are constant and there would be no change in ROE

8-

A & C

rest of points either will not decrease the cash conversion cycle or do not impact the casj conversion cycle

cash conversion cycle = inventory converison period+accounts receivable collection period+payable payment period

9-

E

none of the above

7-

A

ROE WILL NOT CHANGE

ROE = NET INCOME/SALES*(SALES/TOTAL ASSETS)*(TOTAL ASSETS/AVERAGE SHAREHOLDERS EQUITY)

So change is sales would be offset if other variables are constant and there would be no change in ROE

8-

A & C

rest of points either will not decrease the cash conversion cycle or do not impact the casj conversion cycle

cash conversion cycle = inventory converison period+accounts receivable collection period+payable payment period

9-

E

none of the above

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