Increase in its fi nancial leverage.

B. Company A ’ s ROE is higher than Company B ’ s in 2005, apparently refl ecting a strategic

shift by Company A to a product mix with higher profi t margins.

C. Company A ’ s ROE is higher than Company B ’ s in 2005, which suggests that

Company A may have purchased new, more effi cient equipment.

14. Rent - A - Center reported the following information related to total debt and shareholders

’ equity in its 2003 annual report.

($ thousands)

As of 31 December

2003 2002 2001 2000 1999

Total debt 698,000 521,330 702,506 741,051 847,160

Stockholders ’ equity 794,830 842,400 405,378 309,371 206,690

What would an analyst ’ s most appropriate conclusion be based on this data?

A. The company ’ s solvency improved from 1999 to 2002.

B. The company ’ s solvency improved from 2002 to 2003.

C. The data suggest the company increased debt in 2002.

15. Frank Collins observes the following data for two companies:

Company A Company B

Revenue $4,500 $6,000

Net income $50 $1,000

Current assets $40,000 $60,000

Total assets $100,000 $700,000

Current liabilities $10,000 $50,000

Total debt $60,000 $150,000

Shareholders ’ equity $30,000 $500,000

Which of the following choices best describes reasonable conclusions that Collins

might make about the two companies ’ ability to pay their current and long - term

obligations?

A. Company A ’ s current ratio of 4.0x indicates it is more liquid than Company B,

whose current ratio is only 1.2x, but Company B is more solvent, as indicated by its

lower debt - to - equity ratio.

B. Company A ’ s current ratio of 25 percent indicates it is less liquid than Company B,

whose current ratio is 83 percent, and Company A is also less solvent, as indicated

by a debt - to - equity ratio of 200 percent compared with Company B ’ s debt - to - equity

ratio of only 30 percent.

C. Company A ’ s current ratio of 4.0x indicates it is more liquid than Company B,

whose current ratio is only 1.2x, and Company A is also more solvent, as indicated

by a debt - to - equity ratio of 200 percent compared with Company B ’ s debt - to - equity

ratio of only 30 percent.

16. The company ’ s total assets at year - end 1999 were GBP 3,500 million. Which of the following

choices best describes reasonable conclusions an analyst might make about the

company ’ s effi ciency?

A. Comparing 2004 with 2000, the company ’ s effi ciency improved, as indicated by a

total asset turnover ratio of 0.86 compared with 0.64.

B. Comparing 2004 with 2000, the company ’ s effi ciency deteriorated, as indicated by

its current ratio.

C. Comparing 2004 with 2000, the company ’ s effi ciency deteriorated due to asset

growth faster than turnover (i.e., revenue) growth.

17. Which of the following choices best describes reasonable conclusions an analyst might

make about the company ’ s solvency?

A. Comparing 2004 with 2000, the company ’ s solvency improved, as indicated by an

increase in its debt - to - assets ratio from 0.14 to 0.27.

B. Comparing 2004 with 2000, the company ’ s solvency deteriorated, as indicated by a

decrease in interest coverage from 10.6 to 8.4.

C. Comparing 2004 with 2000, the company ’ s solvency improved, as indicated by the

growth in its profi ts to GBP 645 million.

18. Which of the following choices best describes reasonable conclusions an analyst might

make about the company ’ s liquidity?

A. Comparing 2004 with 2000, the company ’ s liquidity improved, as indicated by an

increase in its debt - to - assets ratio from 0.14 to 0.27.

B. Comparing 2004 with 2000, the company ’ s liquidity deteriorated, as indicated by a

decrease in interest coverage from 10.6 to 8.4.

C. Comparing 2004 with 2000, the company ’ s liquidity improved, as indicated by an