chapter 3 Finance 450

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

(EBIT+depreciation)/Interest expense

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

(Total assets - Total equity)/(Total assets)

A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.

26

The DuPont identity breaks ROE into

3 parts

The price-earnings ratio is ________ per share divided by _______ per share

Price; earnings

Receivables turnover is _____ divided by accounts receivable

Sales

Which of the following best explains why financial managers use a common-size income statement?

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

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

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

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

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

Return on assets equals net income ________ by total assets

divided

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

false

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

false

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

false

Return on equity (ROE) is a measure of _____.

profitability

________ financial statements enable one to compare firms that differ in size.

standardized

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

true

The profit margin is equal to net income divided by ______.

sales

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

true

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

true

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

price-sales ratio

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

sales

Common-size statements are best used for comparing:

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

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

income statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase

Inventory turnover is cost of goods sold divided by

inventory

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

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

less than 1

Short-term solvency ratios are also called

liquidity ratios

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

market

The price-earnings (PE) ratio is a ____ ratio.

market value

How is the market-to-book ratio measured?

market value per share/book value per share

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

may not change may increase or decrease

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

net profit margin

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

Net Income/Total Assets

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

Non-Cash expenses

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

It will increase

Long-term solvency ratios measure what aspect of the firm's financial position?

Its financial leverage

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 items are used to compute the current ratio?

Cash accounts payable

Which of the following would help a company take action to improve its ratios?

Comparing to aspirant companies Comparing to major competitors Comparing to peer companies Comparing to its own historical ratios

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

DuPont

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

Which of the following create problems with financial statement analysis?

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

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of __________ available to pay interest.

cash

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

false

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 ______.

liquidity

_____ group analysis is a way to establish a benchmark when using ratios.

peer

One of the most important uses of financial statement information within the firm is:

performance evaluation

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

Sales/Total Assets

True or false: The cash ratio is found by dividing cash by current liabilities.

True

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 increased. The firm has ____________ its liquidity over the past year.

decreased