Finance ch 2 homework

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Finance ch 2 homework
2012-02-09 00:31:03

Questions and answers to homework
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  1. True or False. Explain. A company's return on equity will always equal or exceed its return on assets.
  2. True or Fale. If false, explain. A company's assets-to-equity ratio always equals one plus its liabilities-to-equity ratio
  3. True or False. If false, explain. A company's current ratio must always be equal to or higher than its acid test ratio
  4. True or False. If false, explain. All else being equal, a firm would prefer to have a higher asser turnover ratio
  5. Which company would you expect to have a higher debt-to-equity ratio, a finacial institutuion or a high-technology firm?why?
    • Finacial institution. A finacial institution has a diversified portfolio and highly liquid assetss. It can convert to cash to cover debt payments if needed.
    • High-technology firms tend to be more sensitive to market uncetainty and do not have assets that can easily be converted to cash to cover debt payments
  6. Which company would you expect to have a higher profit margin, a pharmaceutical company that develops new medical drugs, or a grocery store? Why?
    • Pharmaceutical company! pharmaceutical company adds alot of value to its products, so it can charge higher prices and earn a higher profit margin.
    • The grocery store does not add a lot of value to its products. It simply brings goods together under one roof. the grocery store canot boose profit margin by raising prices because customers would shop at another store to pay lower prices for the same products. The pharmaceutical company can change high prices bcause customers cannot get a similar product anywhere.