Business Finance Chapter 3

The debt to equity ratio for a company with $1 million in total debt and $2 million inequity is

total debt/total equity=1/2=.5

Days' sales in receivables is given by the following ratio

365/receivables turnover

What is the formula for computing a firm's sustainable growth rate?

ROE*b / 1-ROE*b

AD Corporation had net income of $300,000 and paid out $125,000 in cash dividends to stockholders. The firm's retention ratio is ___%.

Retention ratio = (EPS - DPS) / EPS OR addition to retained earnings/net income = (net income - dividends)/net income = (300000-125000)/300000=0.58 or 58%

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

PPS/EPS = 30/3 = 10 times

The ____ identity can help to explain why two firms with the same return on equity may not be operating in the same way

DuPont

A firm had operating profit (EBIT) of $300,000 on sales of $500,000. Interest expense was $125,000 and taxes were $60,000. The company has a times interest earned ratio of

EBIT/Interest=300000/125000=2.40

Which of the following is true about sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage

The major downside of using financial statements for analysis is that the data contained in them is based on

historical and book values

The information needed to compute the profit margin can be found on the

income statement

If the management company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be

less than or equal to 1

Based on the DuPont Identity, an increase in sales, all else held equal, ____ ROE

may not change, may increase or decrease

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. What is the return on assets?

net income/total assets=403000/1.48 million=27.23%

What is the main difference between the cash coverage ratio and the times interest earned ratio?

non-cash expenses

If a company has had negative earnings for several periods they might choose to use a

price-Sales ratio

Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

profit margin, financial policy, dividend policy, tat

Return on Equity (ROE) is a measure of

profitability

Whenever _____ information is available, it should be used instead of accounting data.

market

How is the market-to-book ratio measured?

market value per share/book value per share

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

net income/sales = 375000/3.5 million=10.71%

Which one of the following is the correct equation for computing return on assets (ROA)?

net income/total assets

Time-trend analysis is an example of

management by exception

Which of the following is the correct representation of the cash coverage ratio?

(EBIT+depreciation)/interest expense

Which of the following represents the receivable turnover ratio?

sales/accounts receivable

Better Life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. The firm's receivable turnover is ___ times.

sales/accounts receivable=500000/100000=5

Which one of the following equations defines the total asset turnover ratio?

sales/total assets

Which of the following is the correct representation of the total debt ratio?

(total assets-total equity)/total assets

AD Corporation has a return on equity of 20% on total equity (CE) of $800,000. AD generated $1.6 million in sales (SLS) on $2.7 million in assets (TA). If return on equity (ROE) is 20%, use the DuPont decomposition to calculate the profit margin (PM)

10%

Which of the following is (are) true of financial ratios?

Are used for comparison purposes, and are developed from a firm's financial information

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 its own historical ratios, comparing to peer companies, comparing to aspirant companies, and comparing to major competitors

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase

AD Corporation has a return on equity of 20% on total equity of $800,000. AD generated $1.6 million in sales on $2.7 million in assets. A DuPont decomposition of ROE shows the 20% return on equity is from a(n) ____ total asset turnover ratio.

TAT=SLS/TA= 0.5926

Which of the following create problems with financial statement analysis?

The firm or its competitors are conglomerates, the firm and its competitors operate under different regulatory environments, the firm or its competitors are global companies

Which of the following are traditional financial ratio categories?

Turnover ratios, profitability ratios, financial leverage ratios

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ____ to sell

a long time

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

assets-total equity=3.5/1.4=1.50

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

ca/cl=11300/(54800-45000)=1.15

Alpha Star's net income is $300 on $2,000 of sales. The company has $5000 in assets and equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

cash dividends/net income=125/300=41.67%

Which of the following items are used to compute the current ratio?

cash, accounts payable

If a company's balance sheet shows $400 in cash, $100 in inventory, and $200 in current liabilities, its cash ratio is

cash/current liabilities=400/200=2

AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. The firm's inventory turnover is

cogs/inventory=350000/87500=4.00

Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company's current liabilities total $5 million. The quick ratio is

current assets-inventory/current liabilities=7-4/5=0.60

Long-term solvency ratios are also known as

financial leverage ratios

_____ _____ are the prime source of information about a firm's financial health

financial statements

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.0, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation, examination of whether the increase is due to declining inventory or increasing sales

Given an internal growth rate of 3 percent, a firm can

grow by 3 percent or less without any additional external financing