Ch 04: Assignment-Analysis of Financial Statements Aunt Dottie\'s Linen Inc. rep

Question

Ch 04: Assignment-Analysis of Financial Statements Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: O A company with leverage, or a leveraged company O A company with no leverage, or an unleveraged company Which of the following is true about the leveraging effect? O Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth. O Using leverage reduces a firm's potential for gains and losses. Green Penguin Pencil Company has a total asset turnover ratio of 8.50x, net annual sales of $25 million, and operating expenses of $11 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 11% interest rate. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Green Penguin Pencil's debt management ratios? Ratio Value Debt ratio Times-interest-earned ratio The US tax structure influences a firm's willingness to finance with debt. The tax structure debt. more

Explanation / Answer

A company with no leverage

Using leverage can generate shareholder wealth, but if a company fails to make the interest and prinipal payments, credit default can reduce shareholder wealth

total assets = 25/8.5

debt ratio = 1.75/25/8.5 = 0.56

times interest earned = (25 - 11)/0.11*.1.75 = 124.68

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