MGF 301 Ch.4

A long-term debt ratio of 40% states that

$0.40 cents of every dollar of long-term capital is in the form of debt.

XYZ Corporation's market capitalization is $50,000 and shareholders have invested $45,000 in the firm. XYZ's market value added is:

$5,000

XYZ Corporation's shares are selling for $50 a share and the number of shares currently outstanding is 1,000. XYZ's market capitalization is:

$50,000 (Market capitalization = share price x number of outstanding shares = $50 x 1,000 = $50,000)

XYZ's market value of equity is $50,000 and its book value of equity is $45,000. XYZ's market-to-book ratio is _____.

1.11

Which of the following ratios shows how much sales are generated by each dollar of total assets?

Asset turnover ratio

Which of the following ratios shows the number of days it takes customers to pay their bills?

Average collection period

Which of the following ratios shows the number of days in which a company has sufficient inventories to maintain operations?

Average days in inventory

Which of the following are considered advantages of using EVA and Accounting rates of return over market-value based measures?

Can be calculated for a particular division Not affected by economic factors that move stock market prices Show current performance

Which of the following ratios shows the amount of cash and marketable securities for every dollar of current liabilities?

Cash ratio

Which of the following are considered disadvantages of using EVA and Accounting rates of return over market-value based measures?

Current market values of assets are not considered Assets could be grossly undervalued

Which of the following ratios shows the dollar value of current assets for every dollar in current liabilities?

Current ratio

Which of the following ratios are used to determine the liquidity of the firm?

Current ratio Quick ratio

Which of the following refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity?

Financial leverage

When it comes to financial ratios and assessing company performance, management usually look at which of the following?

How the company's financial ratios have changed over time Comparing ratios with companies in the same line of business

Which of the following ratios are used to determine if the financial leverage of the firm is prudent?

Interest coverage ratio Debt ratios

Liquid assets include which of the following?

Inventories of finished goods Accounts receivable

Which of the following ratios compares the level of inventories with the cost of goods sold?

Inventory turnover

Which of the following ratios measure the firm's efficiency with which it uses its assets?

Inventory turnover Asset turnover

ABC Corporation had $3,000,000 in cost of goods sold and $370,000 in inventory. ABC's inventory turnover is _____.

Inventory turnover = cost of goods sold/inventory = $3,000,000/$370,000= 8.11

Which of the following ratios shows the percent of long-term capital that is financed by debt?

Long-term debt ratio

Which of the following are considered drawbacks associated with performance measures?

Market values of privately owned companies are not available for observation The market value of a company's shares reflects investors' expectations Market values fluctuate

Which of the following figures shows the company's potential net reservoir of cash?

Net working capital

According to the Du Pont System, return on assets is dependent upon which of the following two factors?

Operating profit margin Asset turnover

Which of the following ratios measures the proportion of sales that finds its way into profits?

Profit margin

Which of the following ratios shows the amount of quick assets for every dollar of current liabilities?

Quick ratio

Which of the following ratios shows the number of times outstanding credit accounts are collected during the year?

Receivables turnover

Which of the following ratios are used to answer whether assets are used efficiently?

Receivables turnover ratio Asset turnover ratios Inventory turnover ratio

Which of the following are helpful for measuring the firm's profits per dollar of assets?

Return on equity Return on assets Return on capital

Why do analysts look at a firm's cash ratio?

The cash ratio is a measure of the firm's liquidity.

Which of the following ratios shows the extent to which interest obligations are covered by earnings?

Times interest earned ratio

Operating profit margin differs from profit margin in that it considers the company's

after-tax debt interest

Liquid assets are those that can be quickly converted to _______.

cash

When determining if a ratio is good or bad, managers look at industry norms in order to

compare their measures with the measures of companies in the same line of business.

Inventory turnover is __________________________ divided by inventory at the start of the year

cost of goods sold

The inventory turnover ratio is equal to

cost of goods sold divided by inventory at the start of the year

Net working capital of $4,000 states that the company's

current assets exceed current liabilities by $4,000

Most firms would prefer both high profit margin and high turnover; however, this strategy typically leads to lower sales per dollar of assets. The Du Pont formula can help companies

determine if they should pursue a high turnover/low profit margin strategy determine if they should pursue a high profit margin/low turnover strategy Identify the constraints firms face

An asset turnover ratio of 2.10 states that

each dollar of assets produced $2.10 in sales

In order to drill down to compare the performance of a firm's individual divisions, you need to use accounting measures of profitability such as ________.

economic value added

Return on capital and return on assets are used instead of _____ to compare managers whose assets differ in size.

economic value added

The cost of capital is made visible to operating managers through

economic value added

The goal of _________ is to earn at least the cost of capital on assets employed.

economic value added

Asset turnover, inventory turnover, and receivables turnover are all ratios used to measure a firm's __________.

efficiency

A quick ratio of .50 states that

for every dollar in current liabilities the company has $0.50 cents in quick assets

A current ratio of 2 states that

for every dollar in current liabilities the company has $2 in current assets

An operating profit margin of 6.5% states that

for every dollar in sales $0.065 cents is generated in after-tax operating income

A profit margin of 7% states that

for every dollar in sales the company generates $0.07 cents in profit

A highly leveraged company will have a long-term debt-equity ratio that is _________ a less leveraged company.

higher than

A times interest earned ratio of 5 states that

income before interest and taxes covers the interest obligation 5 times.

In good times, financial leverage _____ returns to shareholders.

increases

The long-term debt-equity ratio is a measure of:

leverage

When loaning money, creditors are interested in the borrower's financial leverage as well as their

liquidity

Market value added is equal to

market capitalization minus book value of equity.

The market-to-book ratio is equal to

market value of equity divided by book value of equity.

Market value added is defined as

market value of the firm's shares minus shareholder investment

Economic value added is equal to

net income minus the cost of capital.

Economic value added is defined as the

profit after deducting all costs, including the cost of capital.

Managers can improve economic value added by

reducing assets that are not contributing adequately to profit

Economic value added is also referred to as

residual income.

Market capitalization is equal to

share price times number of shares outstanding.

An average collection period of 32 states that

the company collected payment on average in 32 days

An average days in inventory ratio of 30 states that

the company has inventory to maintain operations for 30 days

Market capitalization is defined as the

total market value of the firm's equity.

Which of the following statements are possible explanations for a high receivables turnover number?

unpaid bills are a small proportion of sales the firm has a restrictive credit policy the firm has an efficient credit department that is quick to follow up on late payers