Chapter 3 LS

A firm has a total debt ratio of 0.30 times. This means the firm has Blank______ in total debt for every $1 in total assets.

$.30

If a firm has a receivables turnover of 13.65 times and accounts receivables of $200. What is the sales?

$2730

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

(EBIT + Noncash expenses)/Interest expense

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

(Total assets − Total equity)/(Total assets)

A firm that collects credit sales quickly will have Blank______ days' sales in receivables than a comparable firm.

lower

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

market value

Which ratios use information that is not contained in financial statements?

market value ratios

The profit margin is equal to net income divided by Blank______. Multiple choice question.

sales

Large inventories are often a sign of Blank______.

short-term trouble

All else equal, a higher profit or _________ margin is preferable.

EBITDA

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

Sales/Total assets

What does a current ratio of 1.4 mean?

The firm has $1.40 in current assets for every $1 in current liabilities.

The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better measure of how much cash is available to meet interest obligations.

depreciation and amortization

A firm with $0.25 in debt for every $1 in assets has an equity multiplier of Blank______.

1.33 Reason: Correct. $1/($1 − 0.25) = 1.33.

Vera 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?

10 times Reason: Correct. $30/$3 = 10 times.

A firm that collects credit sales quickly will have Blank______ days' sales in receivables than a comparable firm. Multiple choice question.

lower

EBITDA is a measure of Blank______ operating cash flow.

pretax

Net income divided by total equity is defined as Blank______.

return on equity

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

a long time

A firm that generates 19 cents in profit for every dollar of equity has a return on equity of _____ percent.

19

What is the EBITDA margin if a firm's EBITDA is $125, sales are $350, and net income is $80?

35.71 percent

Which of these computes days' sales in receivables?

365/receivables turnover

Financial analysis uses EBITDA over EBIT because the former adds back Blank______ and Blank______ and is thus a better measure of pretax operating cash flow.

-depreciation expense -amortization expense

A firm has a total debt ratio of Blank______ times. This means the firm has $0.20 in total debt for every $1 in total assets.

.20

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity= $100. What is the total debt ratio?

.42 Reason: Correct. Debt ratio is debt/total assets. To compute debt, you need to subtract equity from assets. So debt = ($48 + 125 − 100) = $73, and assets = ($48 + 125) = $173, and debt ratio =$73/$173 = 0.42.

A firm with $900,000 in sales, cash on hand of $1,150,000, liabilities of $400,000 and total assets of $2 million has a total asset turnover of Blank______ times. Multiple choice question.

.45

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

.60 Reason: Correct. ($9.2 million − 4.3 million)/$8.1 million = 0.60.

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

1.5 Total debt = assets − equity ($3.5 million − 1.4 million) = $2.1 million debt/equity = $2.1 million /$1.4 million = 1.50. (Equation 3.5)

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times Reason: Correct. $18/($2,700/1,800) = 12 times.

Nestor has a net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

15.91 percent

A firm that generates 18 cents in net income for every dollar in sales has a profit margin of _______ percent.

18 percent

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

2.4 Reason: Correct. $600/$250 = 2.40.

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year-end was $180,000. What is the inventory turnover?

2.5 times

Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

2.90

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?

20.18 percent Reason: Correct. ROE = NI/Equity. Equity = Assets − Debt $51,750/($523,400 − 267,000) = 20.18 percent.

If a firm collects its credit sales in 25 days, on average, it has a days' sales in receivables of ___________.

25

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?

27.23 percent

BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

3.24 Reason: Correct. $54/($584,000/35,000) = 3.24 times.

What is the EBITDA margin if a firm's EBITDA is $175, sales are $540, and net income is $60?

32.41%

A firm with a profit margin of 6.8 percent generates Blank______ cents in net income for every one dollar in sales.

6.8

BC Corporation has net income of $176,000, sales of $1,982,000, and total assets of $2.24 million. What is the return on assets?

7.86 percent

Which two of the following groups are most interested in liquidity ratios?

Bankers Short-term creditors

Financial statements report ______ values.

Book

Cal's Market has a return on equity (ROE) of 15 percent. What does this mean?

Cal generated $0.15 in profit for every $1 of book value of equity.

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

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

How is the EBITDA margin computed?

EBITDA/Sales

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

How is market-to-book ratio measured?

Market value per share/Book value per share

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets.

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 one of the following statements is most likely correct for a firm with days' sales in receivables of 30 days?

The firm finances approximately 8 percent of its annual sales at any given time.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

The current ratio computes the relationship between Blank______.

current assets and current liabilities

The difference between ROA and ROE reflects the use of __________ financing.

debt

The total __________ ratio is equal to the total assets minus total equity all divided by total assets.

debt

An important accounting goal is to report financial information to users in a way that is useful for Blank______.

decision making

Which of the following are noncash expenses on the income statement?

depreciation expense amortization expense

A times interest earned (TIE) ratio of 3.5 times means a firm has Blank______ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

Which of the following are traditional financial ratio categories?

financial leverage ratios turnover ratios liquidity ratios

A times interest earned (TIE) ratio greater than 1 means EBIT is Blank______ the firm's interest expense.

greater than

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

income statement

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

increase

The least liquid current asset is often Blank______.

inventory

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

it will increase

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

less than

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

less than 1

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past 3 years is 30 percent, 34 percent, and 40 percent, respectively. This indicates that the firm has increased its Blank______.

leverage

Current assets on the common-size balance sheet over the past 3 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______. Multiple choice question.

liquidity

Short-term creditors are interested in _________ ratios.

liquidity

A lower PE ratio may indicate that investors believe a company has Blank______ prospects for future growth in earnings.

lower

When the typical stock in the S&P 500 Index has a PE ratio of 12, a company with a PE ratio of 7 may have Blank______ than average growth prospects, given similar earnings per share.

lower

Enterprise value is the sum of a firm's market capitalization and the Blank______ value of its interest-bearing debt Blank______ any cash on hand.

market; less

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

noncash expense

In the DuPont identity, operating efficiency is measured by Blank______.

profit margin

Return on assets (ROA) is a measure of Blank______.

profitability

Return on equity (ROE) is a measure of Blank______. Multiple choice question.

profitability

The net income as shown on the common-size income statement of Omega Industries for the past 3 years increased from 3 percent to 6 percent. This indicates that the firm is increasing its Blank______.

profitability

If the net income on a common-size income statement decreases over time, one can infer that

profitability decreased

Which of the following are traditional financial ratio categories?

profitability ratios asset management ratios market value ratios

Market value measures can be calculated for Blank______.

publicly traded companies

The liquidity of a company with significant amounts of obsolete inventory is best measured by the Blank______ ratio.

quick

______ financial statements provide for comparison of firms that differ in size.

standardized

A Blank______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings. Multiple choice question.

higher

As long as all sales requests are being met, a Blank______ inventory turnover ratio is better.

higher

When analyzing financial performance over time, all else equal, a(n) Blank______ profit or EBITDA margin is preferred.

higher

When the typical stock in the S&P 500 Index has a PE ratio of 12, a company with a PE ratio of 15 may have Blank______ than average growth prospects, given similar earnings per share.

higher

A firm with $600,000 in sales, cash on hand of $750,000, liabilities of $200,000, and total assets of $1 million has a total asset turnover of Blank______ times. Multiple choice question.

.60

What does an inventory turnover ratio of 5 mean?

The entire inventory was sold and replaced 5 times during the year. Inventory turnover = Cost of goods sold/Inventory. An inventory turnover ratio of 5 means the entire inventory was bought and sold 5 times during the year.

True or false: A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both within and outside the firm.

True

Assume cash = $120, inventory = $470, accounts payable = $811, accounts receivable = $510, and total assets = $21,400. What is the current ratio?

(120+510+470)/811 = 1.36

Utilization ratios measure how efficiently a firm uses Blank______.

assets

The days' sales in receivables are frequently called the Blank______.

average collection period

Typically, enterprise value uses Blank______ value of debt because it is widely available.

book

Financial statements report Blank______.

book values

The enterprise value multiple allows for comparing the value of firms with different Blank______ structures.

capital

The enterprise value multiple allows for comparing the value of firms with different Blank______.

capital spending amounts capital structures taxes

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

cash accounts payable

Which of the following ratios include noncash expenses?

cash-coverage ratio

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

created