Attempts: Keep the Highest: 4 4. Debt (or leverage) management ratios Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to acquire their assets, debt (borrowed) funds, and equity funds. Which of the following is considered a financially leveraged firm? A company that uses only equity to finance its assets O A company that uses debt to finance some of its assets Which of the following is true about the leveraging effect? Under economic growth conditions, firms with relatively low leverage will have higher expected returns. O Under economic growth conditions, firms with relatively more leverage will have higher expected returns. Chilly Moose Fruit Producer has a total asset turnover ratio of 6.00x, 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 $2.50 million on which it pays a 7% 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 Chilly Moose Fruit's debt management ratios? Ratio Value Debt ratio Times-interest-earned ratio Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with debt ratios. Grade It Now Save & Continue Continue without saving Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Spandust Industries Inc.'s income statement for the last two years. The company had assets of $11,750 million in the first year and $18.796 million in the second year. Common equity was equal to $6,250 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 6,350 5,000 Operating costs except depreciation and amortization 1,120 1,040 Depreciation and amortization 318 200 Total Operating costs 1,438 1,240 Operating income (or EBIT) 4,912 3,760 Less: Interest 663 489 Earnings before taves (EBT) 4,249 3,271 Less: Taxes (25%) 1,062 818 Net Income 3,187 2,453 Calculate the profitability ratios of Spandust Industries Inc. In the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 75.20 50.1990 Operating margin Profit margin Return on total assets Return on common equity Basic earning power 20.88 v 39.25% 26.13 Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. a company's operating margin increases but its profit margin decreases could mean that the company paid more in interest taxes An increase in a company's earnings means that the profit margini creasing if a company issues new common shares but its net income does not increase return on common equity will increase