BA 303 Business Finance Unit 2
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+depreciation)/Interest expense
What is the formula for computing the internal growth rate (IGR)?
(ROA x b)/(1 - ROA x b)
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/(1 - ROE x b)
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.
10 cents
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
Days' sales in receivables is given by the following ratio:
365/Receivables turnover
Which one of these will decrease a firm's sustainable rate of growth?
An increase in the dividend payout ratio
Cal's Market has return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
Which of the following would help a company take action to improve its ratios?
Comparing to aspirant companies Comparing to major competitors Comparing to its own historical ratios Comparing to peer companies
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
Dividend policy Profit margin Financial policy
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
True or false: The times interest earned ratio is EBIT minus interest.
False
What does maturity hedging involve?
Financing fixed assets with long-term financing and inventories with short-term financing
Which of the following statements about inventory are true?
For retailers, inventories often exceed 25% of assets. For manufacturers, inventories often exceed 15% of assets.
Which of the following are shortage costs?
Order costs Safety reserve costs
What is the term used to describe anything that is used by the firm at the start of its production process?
Raw materials
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
Which one of the following equations defines the total asset turnover ratio?
Sales/Total assets
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets.
What are shortage costs
The costs associated with not having enough inventory on hand
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Which of the following create problems with financial statement analysis?
The firm or its competitors are global companies. The firm or its competitors are conglomerates The firm and its competitors operate under different regulatory environments.
Which of the following are examples of cash disbursements?
capital expenditures payments of accounts payable wages and taxes
The opportunity costs of holding current assets are called ______ costs
carrying
The direct and opportunity costs of keeping inventory on hand are classified as
carrying costs
The primary tool in short-term financial planning is the _______.
cash budget
For US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% of total assets today primarily because of more efficient:
cash management inventory management
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
Demand for an inventory item that becomes a part of another item is usually termed:
derived demand
Return on assets equals net income _____ by total assets.
divided
Financial statement analysis is primarily "management by ________ ."
exception
Shortage costs are those that ______ when the level of investment in current assets is high
fall
True or false: Financial managers usually have primary control over inventory management
false
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
false
True or false: Market-to-book ratio equals book value per share divided by market value per share.
false
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
false
True or false: The dividend payout ratio equals cash dividends divided by sales.
false
Whenever ___________ information is available, it should be used instead of accounting data.
market
The price-earnings (PE) ratio is a ____ ratio.
market value
Which of the following functional areas share control of inventory management?
marketing production purchasing
Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.
may increase or decrease may not change
The retention ratio equals one ____ the dividend payout ratio.
minus
A firm may use a price-sales ratio when it has had ____ earnings over the past year.
negative
The difference between cash collections and cash disbursements is the predicted _____
net cash inflow
The DuPont identity shows that _________ times total asset turnover times equity multiplier equals ROE.
net profit margin
Carrying costs involve
opportunity costs
The price-earnings ratio is _____ per share divided by ______ per share.
price, earnings
If a company has had negative earnings for several periods they might choose to use a __________.
price-sales ratio
Return on assets (ROA) is a measure of _____.
profitability
Return on equity (ROE) is a measure of
profitability
The main problems with maturity mismatching (financing long-term assets with short-term debt) are that it ___.
requires frequent refinancing is risky
The two main types of shortage costs are:
restocking costs safety reserve costs
Carrying costs ______ with the level of investment in current assets.
rise
The two major elements of a firm's short-term financial policy are ___.
the size of the firm's investment in current assets the financing of current assets
Between the 1960's and the present time, current liabilities have risen from about 20% of total liabilities to almost _______ percent.
30
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
False
Inventory turnover is cost of goods sold divided by
Inventory
Which one of the following does not affect ROE according to the DuPont identity?
Investor sentiment
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
false
Long-term solvency ratios are also known as:
financial leverage ratios
If a product is ready to ship or sell, it is called:
finished goods inventory
Given an internal growth rate of 3 percent, a firm can _____
grow by 3 percent or less without any additional external financing
The information needed to compute the profit margin can be found on the ____.
income statement
An increase in the profit margin will ______ a firm's sustainable growth rate
increase
True or false: A way to establish a benchmark for ratio analysis is to identify a peer group
true
True or false: Inventories represent a significant investment for many firms.
true
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
Non-cash expenses
True or false: Receivables turnover is cost of goods sold divided by accounts receivable.
False
True or false: The retention ratio equals one minus the ROA.
False
The dividend payout ratio equals cash dividends divided by net income
True
True or false: Profit margin equals net income divided by sales.
True
True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.
True
What is an unfinished product in a manufacturing process called?
Work-in-progress
Being low on cash can force a firm to ___.
default on debt borrow money sell marketable securities
The firm's demand for finished goods is not derived from demand for other inventory items, so it is sometimes said to be
independent
True or false: A stock-out occurs if a store runs out of inventory and could result in lost customers.
true
The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___.
a minimum
The optimal balance of current ____ occurs where the sum of the carrying costs and the shortage costs is at a minimum.
assets
The profit margin is equal to net income divided by ______.
sales
Being low on cash can force a firm to
sell marketable securities default on debt borrow money
Ideally, short-term assets are financed with ___.
short-term liabilities
The times interest earned ratio is a measure of long-term _____
solvency
Which of the following represent carrying costs of inventory
storage costs losses from theft insurance
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
Carrying costs ______ with inventory levels, whereas shortage costs ______ with inventory levels.
increase; decrease
Receivables turnover is ____ divided by accounts receivable.
sales
True or false: A basic trade-off in inventory management exists because carrying costs increase with inventory levels while shortage costs decrease with inventory levels
true
How is the market-to-book ratio measured?
Market value per share/Book value per share
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
Which of the following is the correct equation for return on equity?
Net income/Total equity
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase.
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
created
True or false: The net payments receivable equals the cash collections minus the cash disbursements.
false
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:
less than 1
Either stock-out or cash-out costs occur when a firm
runs out of available cash runs out of inventory to sell
The financing of current assets is measured by the proportion of
short-term debt and long-term debt used to finance current assets
