Corporate Finance
QUESTION 1

Liquidity is nearer to a cash position, and more of it is always desired by the company, bondholders and shareholders alike.
True

False

QUESTION 2

One management paradox is that managers are rewarded in the short-run for profitability when stockholders should be concerned over the long-run.
True

False

QUESTION 3

With the exception of an IPO, the firms value is set by the market through the laws of supply and demand.
True

False

QUESTION 4

One valuation technique should be used universally and consistently for all valuation decisions.
True

False

QUESTION 5

Trend analysis is most appropriate when looking over five years worth of data.
True

False

QUESTION 6

Ratio analysis is useless unless compared to some other time period or company.
True

False

QUESTION 7

Assets plus liabilities must equal stockholders equity on the balance sheet.
True

False

QUESTION 8

The following shows the ratio analysis of Traction Software relative to the ABC Corporation. Evaluate the company relative to history and the other firm. Include an explanation of each ratio as part of your answer. Tell the company story as signaled by the ratios. Which company will bondholders be more attracted to? Stockholders? Which company is more risky? Calculate the per share price for each year and company (Hint: use the P/E and EPS) Which company would you invest in and why?

Traction Software

Ratio/Year Year Y Year Z ABC Company-Year Z

Price to Earnings 13 15 20

Current 1.06 1.16 1.82

Inventory turnover 10.40 11.37 12.45

Quick .57. 63 1.10

Average collection period 29.6 days 35.3 days 20.2 days

Total asset turnover 5.46 days 7.98 days 3.92 days

Earnings per share .56 .471 .05

Debt ratio .66 .53 .55

Times interest earned 4.8 6.3 5.6

Net profit margin 25% 13% 55%

ROA NMF NMF 15.6%

ROE NMF NMF 34.7%

Beta .961 .021 .35

NMF= Not meaningful

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