1. Artistic Designs, Inc. has a current ratio of 3.0. What would be the impact on the current ratio if the company
a. used cash to pay off some current debt
b. used cash to repurchase some outstanding shares of stock c. used cash to pay a dividend
d. borrowed cash from a local bank to purchase a company-owned automo- bile. The loan is short-term, due in six months.
e. borrowed short term and uses the funds to increase inventory.
2. Dan Jones, the treasurer at Acme Industries, notices that the firm keeps sev- eral million dollars in marketable securities invested in very short-term trea- sury securities. Maturities are from 1 week to 3 weeks. Dan notices that by investing in longer-term government securities, the company can earn, on av- erage, one full percentage point more income on the marketable securities ac- count balance. Let’s assume that Dan implements his strategy and invests in government bonds with 10-year maturities.
a. What would happen if market interest rates suddenly rose (remember the teeter-totter of bond values from Chapter 5)?
b. What impact would Dan’s decision have on ROE if interest rates didn’t rise immediately and the long-term bonds raised income?
c. What impact would Dan’s decision have on the riskiness of the firm?
d. If stockholders knew of Dan’s action, what impact do you think it would have on their valuation of the firm?
3. Honest John’s Used Cars began an advertising campaign stating, “We’ll sell you a car. We’ll finance it.And we won’t check your credit.” John’s car lot went crazy with business. John knew he was taking some big risks by lending money to anybody, but he reasoned that he could increase his sales prices to improve his margins and pay for the inevitable increase in bad debt losses. Explain what you think will happen to Honest John’s asset turnover, inven- tory turnover, and days sales outstanding, and explain your reasoning. What do you think will happen to Honest John’s net income?
4. Borrowers pay thousands of dollars to have their bond issue rated by Stan- dard & Poor’s or Moody’s. Why would borrowers pay so much for these an- alysts’ opinions and their publication? (Hint: Why might investing in having your bonds rated be a positive NPV project?)
5. Some business people have advocated gaining market share as a good indica- tor of firm performance. What’s your opinion of this idea? (Hint: How could a company easily increase its market share, perhaps to 100%? Would this tactic be good business?)