FIN 390 - ch3

Return on equity (ROE) is a measure of

profitability

long term solvency ratios are also known as

ratios that measure a firm's financial leverage

A common-size income statement helps compare financial results over time by controlling for changes in

sales

_____ financial statements provide for comparison of firms that differ in size

standardized

Two most interested in liquidity ratios

suppliers and bankers

The EBITDA ratio is similar in spirit to

the PE ratio

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

the firm collects its credit sales in 45 dys on average

Which one of the following is one way in which financial managers use a common-size balance sheet

to track changes in a firm's capital structure

A common-size balance sheet expresses accounts as a percentage of

total assests

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

1.50 - - Total Debt=Assets-Equity (3.5m-1.4m)=2.1m Debt/Equity=2.1m/1.4m=1.50

If Marley Company has a stock price of $12 per share, 100000 shares outstanding, 432000 in liabilities and 100000 in cash, what is its enterprise value

1532000 - - enterprise value=market value of stock+book value of liabilities-cash (12*100000+432000-100000)=1532000

A firm has an operating profit (EBIT) of $600 on sales of $1000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

2.4 - - EBIT/intrest (600/250)=2.4

Omega Co. has annual sales of 250000, costs of goods sold of 168000, and assets of 322000. Accounts receivable are 86200. What is the receivables turnover?

2.90 - - sales/accounts receivable (250000/86200)=2.90

Which of these computes days' sales in receivables

362/receivables turnover

a firm with a profit margin of 6.8% generates _____ cents in net income for every one dollar in sales

6.8 - - profit margin=net income/sales (6.8/1)=6.8

Alpha Manufacturing has interest expense of $12 million, total assets of $184 million, sales of $176 million, long-term debt of $16.4 million, and net income of $15 million. How will interest expense be recorded in the common-size income statement?

6.82% - - 1.2m/17.6m=6.82

What does a current ratio of 1.2 mean

The firm has 1.20 in current assets for every $1 in current liabilities

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

a value less than 1

Profitability measures such as return on assets (ROA) and return on equity (ROE) are _____ rates of return

accounting

Although ___ ___ are often poor reflections of reality, they are often the best information available.

accounting numbers

Financial statements report

book values

Most used items used to compute the current ratios.

cash and accounts payable

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the

common-size statement

Inventory Turnover

cost of goods sold/average inventory

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

decision making

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

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

higher

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

higher (15-20 average based on historical standards)

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

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

long

Total capitalization equals total equity plus total

long-term debt

The price-earning (PE) ratio is a _____ ratio

market value

How is market-to-book ratio measured

market value per share/book value per share

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

non-cash expenses

When a company has negative earnings for an extended period of time, analysts will often resort to the

price-sales ratio

cash ratio formula

(current assets + inventory) / total current liabilities

A firm has a total debt ratio of .30 times. This means the firm has _____ in total debt for every $1 in total assets

.30 - - total debt/assets (.30/1)=.30

Jensen's has 800 in total assets and 540 in total equity. What is the total debt ratio

.33 - - (800-540)/800=.33

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

.60 - - ($9.2m-4.3m)/$8.1m=.60

DuPoint Identity of ROE affected by three things

1)Operating efficiency 2)Asset use efficiency 3)Financial leverage

Traditional financial ratio categories

1)short-term solvency, or liquidity, ratios. 2)Long-term solvency, or financial leverage, ratios. 3)Asset management, or turnover, ratios. 4)Profitability ratios. 5)Market value ratios.

Cal's market has return on equity (ROE) of 15%. What does this mean?

Carl's generated $.15 in profit for every $1 of book value of equity

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

DuPoint

Account receivable turnover

Sales / Accounts Receivable

interval measure

Indicates how long a newly company can run until it needs to financial fundings

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

It will increase

Which ratio use some information that is not contained in financial statements

Market value

Alpha has assets of $102 million, net income of $4.3 million, and total sales of $97 million. Omega has assets of $12.4 million, net income of $0.74 million, and total sales of $9.3 million. Based on common-size income statements, which company is more profitable?

Omega - - Alpha= $4.3m/$97=4.4% Omega=$0.76m/$9.3m=8.2%

AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets. A DuPont Identity to match the values.

ProfitMargin=20%/(1.6m/.8m)=10% ROA=20%/(2.7m/.8m(=5.93% EM=2.7m/.8m=3.38 times