FIN 3030 - Chapter 3

Which of the following is the correct representation of the total debt ratio? Long-term debt/Total assets Total equity/Total long-term debt (Total assets − Total equity)/(Total assets

(Total assets − Total equity)/(Total assets

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its Blank______. liquidity earnings outlook production efficiency size

liquidity

The price-earnings (PE) ratio is a Blank______ ratio. leverage liquidity market value turnover

market value

Return on assets (ROA) is a measure of Blank______. utilization leverage liquidity profitability

profitability

Return on equity (ROE) is a measure of Blank______. profitability leverage utilization liquidity

profitability

The times interest earned ratio is a measure of long-term _____.

solvency

Which one of the following best explains why financial managers use a common-size balance sheet? to track changes in a firm's capital structure to keep an eye on the firm's profit margin to identify changes in operating costs to monitor labor costs

to track changes in a firm's capital structure

A common-size balance sheet expresses accounts as a percentage of Blank______. sales total equity total assets total liabilities

total assets

Net profit margin is net income/sales.

true

Common-size statements are best used for comparing: year-to-year for your firm. firms of different sizes. firms in different industries. competitors.

year-to-year for your firm. firms of different sizes. competitors.

The Blank______ identity can help to explain why two firms with the same return on equity may not be operating in the same way. DuPont Bourne ratio dilution

DuPont

True or false: Inventory turnover is sales divided by inventory.

False

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

False

True or false: The times interest earned ratio is EBIT minus interest.

False ; divide

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

False ; less than

How is the price-earnings (PE) ratio computed? Book value per share/Earnings per share Market capitalization/Earnings per share Market price per share/Earnings per share Sales price per unit/Earnings per share

Market price per share/Earnings per share

How is the market-to-book ratio measured? Market value of sales/Book value of costs Market value per share/Book value per share Market value of bonds/Book value of bonds Book value per share/Market value per share

Market value per share/Book value per share

The price-earnings ratio is____ per share divided by______ per share.

Price, Earnings

The DuPont identity shows that _____ _____ times total asset turnover times equity multiplier equals ROE.

Profit Margin

A firm has $100 in total assets and $40 in debt.

The equity is equal to $60. The firm has more equity than debt. The equity ratio is 60%. The debt ratio is 40%.

A firm has $100 in sales and net income of $5.

The expense ratio is 95%. All expenses combined including cost of goods sold, operating expenses and non-operating expenses must be $95. In order to improve net profit margin, expense ratio has to go down. The net profit margin is 5%.

True or false: Profit margin equals net income divided by sales.

True

A firm with a market-to-book value that is greater than 1 is said to have Blank______ value for shareholders. maintained created destroyed reduced

created

The current ratio computes the relationship between Blank______. current and long-term assets current assets and long-term liabilities current and liquid assets current assets and current liabilities

current assets and current liabilities

If a company has inventory, the quick ratio will always be Blank______ the current ratio. less than greater than equal to

less than

Standardized balance sheet describes each item as a percentage of sales, while standardized income statement lists each item as a percentage of total assets.

False

True or false: Financial ratios are computed using only balance sheet information.

False

True or false: The price-earnings ratio is price per share times earnings per share.

False

Which of the following is the correct equation for return on equity? Net income/Sales Total equity/Net income Sales/Net income Net income/Total equity

Net income/Total equity

Which of the following represents the receivables turnover ratio? Cost of goods sold/Accounts receivable Accounts receivable/Cost of goods sold Sales/Accounts receivable Accounts receivable/Sales

Sales/Accounts receivable

Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has (increased/decreased) its liquidity over the past year.

decreased

The information needed to compute the profit margin can be found on the Blank______. balance sheet cash flow statement income statement

income statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will Blank______. decrease increase remain unchanged

increase

Inventory turnover is cost of goods sold divided by _____.

inventory

Which one of the following does not affect ROE according to the DuPont identity? financial leverage asset use efficiency operating efficiency investor sentiment

investor sentiment

Based on the DuPont Identity, an increase in sales, all else held equal, Blank______ ROE. will always decrease may increase or decrease will always increase may not change

may increase or decrease may not change

Which one of the following is the correct equation for computing return on assets (ROA)? net income/total assets sales/total assets total assets/net income net income/sales

net income/total assets

In a common-size income statement, each item is expressed as a percentage of total .

sales

The profit margin is equal to net income divided by Blank______. total assets net working capital sales operating income

sales

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

True

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

True

Which of the following are true of financial ratios? They always reflect market values. They are developed from a firm's financial information. They use only balance sheet data. They are used for comparison purposes. They are computed in the same manner by all firms.

They are developed from a firm's financial information. They are used for comparison purposes.

The DuPont identity breaks ROE into ____ parts.

Three

A firm with a profit margin of 10 percent generates Blank______ in net income for every dollar in sales. 10 dollars 1 dollar 90 cents 10 cents

10 cents

Which of the following best explains why financial managers use a common-size income statement? The common-size income statement can show sources of cash for the company. The common-size income statement can show which costs are rising or falling as a percentage of sales.

The common-size income statement can show which costs are rising or falling as a percentage of sales.

Assets may be grouped into current assets and fixed assets.

True

Which of the following items are used to compute the current ratio? earnings cash equipment accounts payable

cash accounts payable