Ch 3 SB & HW

Which of the following would represent a correct calculation of interest earned on a six month, $100 investment?

$100 principal x 10% rate x 6/12 = $5 interest

The annual rate of return on a six-month investment of $1,000 that earns a return of $100 is:

($100/$1,000) / 6/12 = 20%

Rate of Return is calculated by

Amnt of Return/Amnt Invested

Acid Test Ratio

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities The acid-test ratio uses the same denominator as does the current ratio. The acid-test ratio excludes merchandise inventory from the numerator. The acid-test ratio is a more conservative measure of liquidity than is the current ratio.

margin

Emphasizes that from every dollar of sales revenue, some amount must work its way to the bottom line for the company to be profitable Net income/sales

semilogarithmic graph

Many analysts instead prefer to plot data that will change significantly over time on a graph that uses a logarithmic vertical scale. This is called a semilogarithmic graph bc the horizontal scale is still arithmetic; the intervals between years, for example, are equal. The primary advantage of semilogarithmic presentation is that a constant rate of growth will result in a straight-line plot.

return on investment DuPont model

Net Income/Sales X Sales/Avg total assets M x T

Return on Equity

Net income/Avg Stockholders Equity 12-18%

turnover

Relates to the efficiency in which the firms assets are being used in the revenue generating process Sales/average total assets

Current Ratio

current assets divided by current liabilities

Trend analysis of ratios:

is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in the ratios In most cases, a single ratio does not describe very much about the company whose statements are being studied, Much more meaningful analysis is accomplished when the trend of a particular ratio is over several time periods is examined,

Working capital:

is expressed as a dollar amount, rather than as a financial ratio. is the excess of a firm's current assets over its current liabilities. current assets-current liabilites

Liquidity refers to

its ability to meet its current obligations as they become due.

ROI

net income/average total assets Operating income/avg operating assets

To calculate the amount of interest earned on an investment, you would need to know:

the interest rate per year the principal amount invested the length of time the funds are invested for Interest=PrincipalxRatexTime