chapter 3 vocab final
Average Collection Period (ACP)
(Accounts Receivable x 365 days)/credit sales or 365 days/accounts receivable turnover
Accounts Payable Turnover (APP)
(Accounts payable x 365 days)/cost of goods sold or 365 days/accounts payable turnover
Quick Ratio (Acid Test Ratio)
(Current Assets - Inventory) / Current Liabilities
How is inventory turnover related to days' sales in inventory?
**The shorter the inventory period, the higher the turnover rate** -the longer the inventory period, the higher the turnover rate **the lower the turnover rate, the more days' sales that are held in inventory**
Which of these is a factor which requires caution when using ratios to evaluate firm performance?
- Comparing firms with varying fiscal years - Window dressing of annual financial statements by some firms.
A levered firm's sustainable growth rate increased this year. Which one of these might have caused that increase, all else equal? Select all that apply.
- Increase in operating efficiency - Increase in financial leverage
current ratio
- the broadest liquidity measure -measures the dollars of current assets available to pay each dollar of current liabilities -current assets/current liabilities
Inventory Turnover Ratio
=cost of goods sold/average inventory
What does a dividend payout of 45% indicate?
A 45% dividend payout indicates a form pays 45% of its net income available to common stockholders out on common dividends.
Which one of these is a correct interpretation of a cash coverage ratio of 1.4?
A cash coverage ratio of 1.4 indicates a firm generates $1.40 of operating cash for every dollar of interest and fixed charges that the firm owes.
Which one of theses is a correct interpretation of a cash coverage ratio of 1.4?
A cash coverage ratio of 1.4 indicates a firm generates $1.40 of operating cash for every dollar of interest and fixed charges that the firm owes.
How is a debt ratio 0.45 interpreted?
A debt ratio of .45 means that for every dollar of assets, a firm has $.45 of debt and $.55 of equity.
How is a debt ratio of .45 interpreted?
A debt ratio of .45 means that for every dollar of assets, a firm has $.45 of debt and $.55 of equity.
What does a debt-to-equity ratio of 0.8 mean?
A debt-to-equity ratio of 0.8 means the firm has $0.80 of debt for every $1 of equity.
What does a dividend payout of 30% indicate if a firm has no preferred stock outstanding?
A dividend of 30% for a firm with no preferred stock indicates that common stock dividends equal 30% of net income.
What does a dividend of 30 percent indicate if a firm has no preferred stock outstanding?
A dividend payout of 30 percent for a firm with no preferred stock indicates that common stock dividends equal 30 percent of net income.
What does a dividend payout of 30% indicate if a form has no preferred stock outstanding?
A dividend payout of 30% indicates that common stock dividends equal 30% of net income.
How can a low dividend payout increase future returns on equity (ROE)?
A low dividend payout means more of a firm's earnings are retained for future growth, which is expected to increase earnings and ROE.
The eatery has a market-to-book ratio of 3.2. What does this ratio indicate?
A market-to-book ratio of 3.2 means shareholders are willing to pay $3.20 per dollar of book equity to buy the firm's stock
The Eatery has a market-to-book ratio of 3.2. What does this ratio indicate?
A market-to-book ratio or 3.2 means shareholders are willing to pay 3.20 per dollar of book equity to buy the firm's stock.
Debt management ratios are used to do which of the following?
ALL -Debt management ratios measure the extent to which a firm uses debt to finance its assets. -Debt management ratios determine whether or not a firm can meet its debt obligations. -Debt management ratios determine the amount of financial leverage used by a firm.
Which of these are correct versions of the ROE?
ALL -ROE=Profit margin(1/Capital intensity ratio)x(1+Debt-to-equity) -ROE=ROA x(1+Debt-to-equity) _ROE=Profit margin x Total asset turnover x Equity multiplier
Accounts Receivable Turnover
ART=credit sales/accounts recievable
Two firms have the same amount of assets and equity. Form A has a market-to-book value of 3.6 compared to 2.9 for Firm B. Which one of these statements is generally correct given this information?
Firm A is expected to outperform Firm B in the future.
DJ's has an equity multiplier of 1.5. Which one of these statements is correct given this information?
For every $1 of equity, DJ has $.50 of debt and total assets of $1.5.
Kelso's has an average collection period of 49 days. How do you interpret this? Page 63
On average, Kelso's receives cash for a sale 49 days after a credit sale occurs.
Kelso's has an average collection period of 49 days. How do you interpret this?
On average, kelso's receives cash for a sale 49 days after a credit sale occurs.
Treeline Resorts has a basic earning power ratio of 1.6 compared to 1.8 for Outer Limits Resorts. Which one of these statements is correct based on this information?
Outer Limits is generating more operating profit per dollar of assets than Treeline.
Treeline Resorts has a basic earnings power ratio of 1.6 compared to 1.8 for Outer Limits Resorts. Which one of these statements is correct based on this information?
Outer Limits is generating more operating profit per dollar of assets than Treeline.
Oyster Fields has an average payment period of 21 days as compared to it's industry average of 33 days. Suppliers in the industry have a 30-day credit policy. Which one of these statements most applies to Oyster Fields?
Oyster Fields is not maximizing it's use of free financing.
Petty's has a fixed asset turnover of 2 and a sales to working capital ratio of 4. The industry averages are 1.5 and 3, respectively. Assume all firms in the industry use the same depreciation method and have equipment of similar age. Which one of these statements is correct?
Petty's has twice the amount of net fixed assets as it does net working capital.
Assume you are given the values for sales, taxable income, preferred and common stock dividends, interest, and the tax rate. How would you calculate the profit margin?
Profit margin={(taxable income X(1-Tax Rate))-Preferred dividends}/sales
Profit margin
Profit margin={(taxable income X(1-Tax Rate))-Preferred dividends}/sales
Jen's has current assets of $2200, cash of $400, and inventory of $1300. The firm has accounts payable of $300, long-term debt of $3100, and accrued wages and taxes of $400. What is the quick ratio?
Quick ratio= (current assets-inventory)/current liabilities (2200-1300)/(300+400) 900/700=1.29
Which one of these is the correct fully deconstructed version of the return on assets?
ROA=(Net income available to common stockholders X Sales)/(Sales X Total Assets)
Which one of these formulas correctly defines the retention ratio (RR) for a levered firm within both preferred and common stock?
RR= 1- Dividend Payout
Which one of these formulas correctly defines the retention ratio(RR) for levered firm with both preferred and common stock?
RR=1-Dividend Payout
inventory turnover
Sales or cost of goods sold/Inventory -cost of goods sold is used when managers want to emphasize that inventory is listed in the balance sheet at cost.
Fixed Asset Turnover Ratio
Sales/Net Fixed Assets
Total Asset Turnover Ratio
Sales/Total Assets
Sales to Working Capital Ratio
Sales/working capital
The Bakery has a quick ratio of 1. This means the firm can pay it short-term debts without doing which one of the following?
Selling any inventory
Assume a form has an equity multiplier of 1.2. Given this, what is the relationship between the internal growth rate and the sustainable growth rate?
Sustainable growth rate > Internal growth rate
Assume a firm has an equity multiplier of 1.2. Given this, what is the relationship between the internal growth rate and the sustainable growth rate?
Sustainable growth rate> internal growth rate
Which one of these is the best definition if the DuPont system of analysis?
The DuPont system is an analytical method of breaking the ROA and ROE down into their component pieces.
Walker's has a price-earnings (PE) ratio of 16 compared to its industry average of 17. Generally speaking, which one of these statements applies to this situation?
The average firm in the industry outperforms Walker's.
The DuPont system of analysis shows how the return on equity is dependent upon the return on assets.
True ROE=ROA X Equity multiplier
accounts recievable turnover
credit sales/account receivable
without AR terms incentive
customers may choose to buy with firm's competitors who offer better credit terms.
asset management ratios
measure how efficiently a firm uses its assets (inventory, accounts receivable, and fixed assets), as well as its accounts payable
liquidity ratios
measure the relationship between a firm's liquid (or current) assets and its current liabilities
Jen's has current assets of $2200, cash of $400, and inventory of $1300. The firm has accounts payable of $300, long term debt of $3100, and accrued wages and taxes of $400. What is the quick ratio?
-0.71 -3.00 -1.29 -1.03 Quick ratio= current assets-inventory/current liabilities ($2200-$1300)/($300+$400)=1.29
Quick Ratio-Jen's has current assets of $2200, cash of $400, and inventory of $1300. The firm has accounts payable of $300, long term debt of $3100, and accrued wages and taxes of $400. What is the quick ratio?
-0.71 -3.00 -1.29 -1.03 Quick ratio= current assets-inventory/current liabilities ($2200-$1300)/($300+$400)=1.29
NY News has net earnings per share of $3.24, a book value per share of $22, and a market-to-book ratio of 2.5. What is the price-earnings (PE) ratio?
-16.98 Market-to-book ratio=market price per share/book value per share price earnings (PE) ratio=market price per share/earnings per share
Current Ratio-The Shoe Store has cash of $300, accounts receivable of $700, accounts payable of $800, inventory of $1300, long-term debt of $1900, and notes payable in three months of $500. What is the current ratio?
-2.88 -2.14 **1.77** -0.72 Current Assets =$300+$700+$1300=$2300 Current liabilities= $800+$500=$1300 Current ratio=$2300/$1300=1.77
The Shoe Store has cash of $300, accounts receivable of $700, accounts payable of $800, inventory of $1300, long-term debt of $1900, and notes payable in three months of $500. What is the current ratio?
-2.88 -2.14 **1.77** -0.72 Current Assets =$300+$700+$1300=$2300 Current liabilities= $800+$500=$1300 Current ratio=$2300/$1300=1.77
Last year, a firm had a current ratio of 1.14. This year, the ratio is 0.98. Assuming everything else equal, what do these values imply? NOTE: THE CURRENT RATIO DOES NOT INDICATE THE DOLLAR VALUE OF EITHER THE CURRENT ASSETS OR THE CURRENT LIABILITIES. IT JUST MEASURES THE RELATIONSHIP BETWEEN THE TWO. CURRENT LIABILITIES COULD HAVE INCREASED, DECREASED, OR REMAINED CONSTANT.
-THE FIRM PAID OFF SOME OF ITS SHORT-TERM DEBT OVER THE PAST YEAR -THE PROBABILITY OF THE FIRM ENCOUNTERING FINANCIAL DISTRESS IS LESS NOW THAN IT WAS A YEAR AGO. **THE FIRM IS LESS LIQUID THIS YEAR THAN IT WAS LAST YEAR.** -THE FIRM HAS LESS CURRENT ASSETS THAN IT DID ONE YEAR AGO.
What must the capital intensity ratio be if the total asset turnover rate is 2?
0.5 Total asset turnover rate= sales/total assets capital intensity= total assets/sales total asset=2/1=2 capital intensity=1/2=.5
Days' Sales in Inventory Ratio
365 days / inventory turnover or (Inventoryx365 days)/Inventory Turnover
Average Collection Period
365/accounts receivable turnover or accounts receivable x 365/ credit sales -measures the number of days accounts receivable are held before the firm collects cash from the sale. - also called DSO
days' sales in inventory
365/inventory turnover or inventory x 365 days/sales or cost of goods sold -measures the number of days that inventory is held before the final product is sold.
A levered firm's sustainable growth rate increased this year. Which of these might have caused that increase, all else equal?
BOTH -Increase in operating efficiency -Increase in financial leverage
If you want to compare the operations of similar firms without the firm's capital structure or tax status affecting that comparison, which ratio should you use?
Basic Earning Power
Buster's quick ratio decreased from 0.81 to 0.76 during the year while its current ratio increased from 1.43 to 1.57. What do these changes in the ratio values imply?
Buster's is increasingly reliant on selling its inventory to meet its current obligations.
Which of these best defines cross-sectional analysis?
Cross-sectional analysis analyzes the performance of a firm against one or more companies in the same industry.
Current Ratio Formula
Current Ratio = Current Assets / Current Liabilities
Dee's had a return on assets (ROA) of 14.4 percent last year as compared to 14.7 percent this year. What do these ratio values imply?
Dee's earned more income for its common shareholders per dollar of assets than it did last year.
The supplier of Denver Press offer the firm 30 days credit on all its purchases. Denver Press has an average payment period of 84 days as compared to its industry average of 43 days. Which of these statements applies to Denver Press?
Denver is most likely abusing its credit terms.
To reduce the number of days' sales held in inventory, a firm needs to decrease the inventory turnover rate. True or False?
False
Two firms have the same amount of assets and equity. Firm A has a market-to-book value of 3.6 compared to 2.9 for Firm B. Which one of these statements is generally correct given this information?
Firm A is expected to outperform Firm B in the future.
The return on assets reflects which value as a percentage of total assets?
Net income available to common stockholders
General speaking, a high price-earnings(PE) ratio indicates which one of the following as compared to a low PE ratio?
Greater Risk
Abel's has a total asset turnover rate of 2.2 as compared to its industry average of 1.8. Which one of these might be the cause of Abel's higher rate?
Inventory Stockouts
Inventory Turnover
Inventory Turnover=Sales or Cost of goods sold/inventory
A firm currently has no preferred stock. Assume the firm issues some preferred stock while it's taxable income and tax rate remain constant. How will the return on equity be affected?
Issuing preferred stock under these conditions will decrease the return on equity.
JJ's has a cash ratio of 0.25. How do you interpret this value?
JJ 's has sufficient cash and marketable securities to pay 25 percent of its current liabilities.
For publicly traded firms, market value ratios may be more important than other ratios for which reason?
Market value ratios reflect investors' opinion of a firm's future performance and risk
McDowell's has an ROE of 12.6% based on a profit margin of 6%, a total asset turnover of 1.4, and an equity multiplier of 1.5. The industry values are 13.1%, 7.2%, 1.3, and 1.4, respectively. Which one of these statements is accurate?
McDowell's uses its assets more efficiently to produce sales than does the average firm in the industry.
Last year, Delta's times interest earned ratio was 1.8. This year the ratio is 0.8. How should this change in value be interpreted?
The decrease in the ratio to a value less than 1 indicates the firm's debt load may have become too large for the firm.
How do you interpret an internal growth of 3%?
The firm can grow by a maximum of 3% if it only uses internally-generated financing.
Which one of these is a correct assumption given a firm with an increasing return on equity (ROE) for each of the past 5 years? Assume the firm's ROE currently equals the industry ROE.
The firm earned more profit per dollar of investment for its common stockholders last year than it did in the previous four years.
Which one of these is a correct assumption given a firm with an increasing return on equity (ROE) for each of the past five years? Assume the firm's ROE currently equals the industry ROE.
The firm earned more profit per dollar of investment for its common stockholders last year than it did in the previous four years.
Lester's has a current ratio of 0.86. What does this indicate?
The firm has $0.86 in current assets for every $1 it must pay in obligations within the next year.
Last year, a firm had a current ratio of 1.14. This year, the ratio is 0.98. Assuming everything else equal, what do these values imply?
The firm is less liquid than it was last year.
Last year, a form had a current ratio of 1.14. This year, the ratio is 0.98. Assuming everything else equal, what do these values imply?
The firm is less liquid this year than it was last year.
Over the past three years, Art's Bakery has increased it's debt and lowered its equity. Which one of these statements is most apt to apply to this firm?
The firm's safety cushion that helps absorb earning fluctuations is diminishing.
Over the past the past three years, Art's Bakery has increased its debt and lowered it's equity. Which one of these statements is most apt to apply to this firm?
The firm's safety cushion that helps absorb earnings fluctuations is diminishing
Over the past three years, Art's Bakery has increased its debt and lowered its equity. Which one of these statements is most apt to apply to this firm?
The firm's safety cushion that helps absorb earnings fluctuations is diminishing.
PJ's has an average collection period of 42 days as compared to the industry average of 40 days. Which of these statements is supported by this information?
The industry, on average, turns over its accounts receivables more times a year than PJ's does.
What is the retention ratio?
The retention ratio is the percentage of net income available to common stockholders that is added to retained earnings.
The Corner Store graphs it's return on equity by quarter for a running 5-year period. This time series analysis. True or False?
True
two frequently used ratios
are the inventory turnover and days' sales in inventory
firms offer AR terms
as incentive to get customers to buy products from their firms rather than a competing firm. - this allow customers to buy more now and pay later
cash ratio formula
cash + marketable securities / current liabilities
a good sign of management
high AR turnover or low ACP
a firm wants to produce a high level of sales per dollar of accounts reciebale
it wants to collect its AR as quickly as possible to reduce any cost of financing accounts receivable, including interest expense on liabilities used to finance accounts receivable and defaults associated with accounts receivable.
a firms wants to produce a high level of sales per dollar of inventory
it wants to turn inventory over as quickly as possible
if extremely high AR turnover or extremely low ACP
the firms AR policy may be so strict that customer prefer to do business with competing firms. - sign of bad firm management
managers must consider
the trade-off between the advantages of holding sufficient levels if inventory to keep the production process going versus the cost of holding large amount of inventory.
Capital Intensity
total assets/sales