3. What is the debt/equity ratio and the debt ratio for a firm with total debt of $700,000 and equity of $300,000?


4. A firm with sales of $500,000 has average inventory of $200,000. The industry average for inventory turnover is four times a year. What would be the reduction in inventory if this firm were to achieve a turnover comparable to the industry average?


5. Company A has three debt issues of $3,000 each. The interest rate on issue A is 4 percent, on B the rate is 6 percent, and on C the rate is 8 percent. Issue B is subordinate to A, and issue C is subordinate to both A and B. The firm’s operat- ing income (EBIT) is $500. Compute the times-interest-earned ratio for issue C. What does the answer imply? Does the answer mean that the interest will not be paid?


7. Two firms have sales of $1 million each. Other financial information is as follows:
Firm A Firm B
EBIT $150,000 $150,000
Interest expense 20,000 75,000
Income tax 50,000 30,000
Equity 300,000 100,000
What are the operating profit margins and the firms? What is their return on equity? Why are the same for each firm, what can you conclude about their respective uses of debt financing?