FIN 320 CH 3

Last year, Benton Inc. had net income of $3.5 million and paid out $700,000 in cash dividends. If income this year is $4.1 million and the dividends payout ratio is held constant, how much will be paid in dividends

$820,000 4.1mil (700,000 / 3.5m) = 820,000

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

(EBIT + depreciation) / interest expense

What is the formula for computing the internal growth rate (IGR)

(ROA * b) / (1 - ROA * b)

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 of $800,00. AD generated $1.6 million in sales on $2.7 million assets. A DuPont decomposition of ROE shows the 20% return on equity is from a(n)__ total asset turnover ratio.

0.59 TAT = SLS/TA

Assume current assets - $11,300; long term liabilities = $45,00; and total debt = $54,800. What is the current ratio?

1.15 11,300 / (54,800 - 45, 000)

Alpha Co. has interest expense of $1.2 million, total assets of $84 million, sales of $76 million, long term debt of $16.4 million, and net income of $12.1 million. How will interest expense be recorded in the common size income statement?

1.58% 1.2m / 76m = 1.58%

AD Corp 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 assets (TA). A DuPont decomposition of ROE shows the 20% return on equity (ROE) is from a(n) ___% profit margin (PM)

10

BC Corp has sales of $1,000,000 and cost of good sold of $450,000 for the year. Inventory at year end was $180,000. The firm's Days sales in inventory is:

146

BC Corp had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. The firms Days sales in inventory is:

146 Inventory turnover (ITO) = COGS / INV; DSI = 365/ITO; ITO = $450,000/$180,000 = 2.5; DSI = 365/2.5 = 1.46

Nestor's has 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% 315,000 / 1.98m

AD corporation has net income of $425,000 and total sales of $2.5 million. The firms profit margin is __ %

17

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

2.0

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

2.40 TIE ratio = $300,000 / $125,000 = 2.40

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

2.90 250,000/86,200

A firm with a 26% return on equity earned __ cents in profit for every one dollar in shareholders equity.

26

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

287

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 times $54 / (584,000/ 35,000)

Days's sales in receivables is given by the following ratio:

365/receivables turnover

Alpha Star's net income is $300 on $2,00 of sales. The company has $5,000 in assets and equity of $3,000. The firm paid out $125 in cash dividend. What is the dividend payout ratio?

41.67% Payout ratio = cash dividends / net income $125 / $300 = 41.67

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 firms receivable turnover is __ times

5 2,000,000 * .05 = $100,000 (accounts receivable) 5000.000 / 100,000 = 5

AD Corp return on assets is 14% and the firm retains 40% of all its earnings. AD's internal growth rate is __%.

5.93 (.14 * .40) / (1 - .14 * .40) = 5.93

Rock construction has current assets of $45 million, total liabilities and equity of $67 million, and sales of $59 million. How would current assets be expressed on a common size balance sheet?

67% $45m / $67m = 67

Turner's return on equity is 12% and its retention ratio is 60%. What is its sustainable growth rate?

7.76% (.12 * .60) / (1 - .12 *.60)

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

7.86% 176,000 / 2.24m

Alpha manufacturing has cost of good sold of $90 million and a net income of $9.6 million on total sales of $120 million. Total assets are $150 million. A common size income statement will show cost of goods sold of 75% and a net profit of __%

8 Net profit(%) = 9.6/120

BC corporation had net income of $3.5million and paid out $700,000 in cash dividends to stockholders. Their retention ratio is __%

80 Retention ratio = (3.5m - 0.7k)/3.5 = 80

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

Book values Historical values

Cal's market has return on equity (ROE) of 15%. 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

The current ratio computes the relationship between ___

Current assets and current liabilities

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

DuPont

Which of the following is true about the sustainable growth rate?

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

Which of the following would a company wish to compare its ratios against?

Its own historical ratios Aspirant companies Peer companies Major competitors

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

Less than

How is the market to book ratio measured?

Market value per share / book value per share

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

Net income/total assets

Which of the following is the correct equation for return on equity?

Net income/total equity

Based on ROE and the sustainable growth rate, which of the following factors affects a firms ability to sustain growth?

Profit margin Financial policy Dividend policy

The profit margin is equal to net income divided by ___

Sales

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

Sales / total assets

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

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

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

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

What does the times interest earned (TIE) ratio of 3.5 times mean?

The company's interest obligations are covered 3.5 times versus EBIT

Which of the following create problems with financial statement analysis?

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

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

created

The PE ratio measures how much investors are willing to pay per dollar of __ earnings.

current

Financial statement analysis is primarily management by ___

exception

Long term solvency ratios are also known as:

financial leverage ratios

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation

An increase in a firm's total asset turnover will ___ the sustainable growth rate.

increase

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

increase

Long-term debt on the common size balance sheet of Solid Rock Construction over the past three years id 30%, 34%, and 40% respectively. This indicates that the firm has increased its __

leverage

Current assets on the common size balance sheet over the past three years have increased from 32 to 35% while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its ___

liquidity

Time-trend analysis is an example of

management by exception

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

market

The price earnings ratio (PE) is a __ ratio

market value

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

may not change may increase or decrease

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

non - cash expense

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

price-sales ratio

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

A common size balance sheet expresses accounts as a percentage of __.

total assets

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

Which of the following are traditional financial ratio categories?

Turnover ratios Profitability ratios Financial leverage ratios