Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm??
A. ?If the debt/assets ratio increases, the TIE ratio will also increase.
B. ?If the debt/assets ratio decreases, the TIE ratio will increase.
C. ?If the debt/assets ratio decreases, the TIE ratio will also decrease.
D. ?The debt/assets ratio will always be equal to the TIE ratio.
E. ?The debt/assets ratio and the TIE ratio are not related to each other.
Answer: B
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Assets Current assets$ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets$139,000,000 Liabilities and Equity Accounts payable$ 10,000,000 Accruals 9,000,000 Current liabilities$ 19,000,000 Long-term debt (40,000 bonds, $1,000 par value) 40,000,000 Total liabilities$ 59,000,000 Common stock (10,000,000 shares)30,000,000 Retained earnings 50,000,000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity$139,000,000 The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%. Refer to the data for the Collins Group. Based on the CAPM, what is the firm's cost of common stock? A. 11.15% B. 11.73% C. 12.35% D. 13.00% E. 13.65%