FIN CH 3
Which of the following items are used to compute the current ratio?
-Accounts payable (liability) -cash (asset)
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.
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
False Reason: There is no theory or set method to select the ratios to use in financial statement analysis.
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. Reason: The sustainable growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage.
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share Reason: Market cap = price per share * number of shares outstanding. Market cap/Net Income is equal to Market price per share/Earnings per share.
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
ROE
Profit Margin x Total Asset Turnover x Equity Multiplier
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
________ financial statements enable one to compare firms that differ in size.
Standardized
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 firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average. Reason: Days sales in receivables = 365/receivables turnover. Because receivables turnover is the number of times the accounts receivable are charged and paid during the year (365 days), the days sales in receivables ratio tells how many days it takes to collect all the receivables (on average).
Given an internal growth rate of 3 percent, a firm can _____.
grow by 3 percent or less without any additional external financing Reason: Growing at a rate greater than 10 percent would require external financing.
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 Reason: Receivables turnover = sales/accounts receivable. If sales increase and there is no change in receivables, receivables turnover would increase.
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase; Reason: Receivables turnover = sales/accounts receivable. If sales increase and there is no change in receivables, receivables turnover would 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; since the quick ratio excludes inventory, it will always be less than the current ratio
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 (PE) ratio is a ____ ratio.
market value
How is the market-to-book ratio measured?
market value per share/ book value per share
earnings per share
net income or profit divided by the number of stock shares outstanding
The price-earnings ratio is
price per share divided by earnings per share
Return on assets (ROA) is a measure of _____.
profitability
price-sales ratio
stock price/ (sales/shares)
price-earnings ratio
stock price/ EPS
market-to-book ratio
stock price/book value per share
retained earnings
the amount of net income retained in the corporation
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
A common-size balance sheet expresses accounts as a percentage of ______.
total assets Reason: a common-sized balance sheet expresses accounts as a percentage of total assets
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
net income
additions to retained earnings plus dividends
Net income
additions to retained earnings plus paid out cash dividends
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.
10 cents
The DuPont identity breaks ROE into__________ parts
3
Return on equity (ROE) is a measure of _____.
profitability
In a common-size income statement, each item is expressed as a percentage of total
sales
The profit margin is equal to net income divided by ______.
sales
True or false: Profit margin equals net income divided by sales.
true
True or false: The cash ratio is found by dividing cash by current liabilities.
true
True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
true Reason: It is important to investigate trends in financial ratios to identify the reason for the trend.
cash coverage ratio
(EBIT + Depreciation) / Interest
What is the formula for computing the internal growth rate (IGR)?
(ROA x b)/(1 - ROA x b)
sustainable growth rate
(ROE x b) / (1 - ROE x b)
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/(1 - ROE x b)
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
True or false: The total debt ratio equals the total assets minus total equity all over total assets.
(total assets - total equity) / total assets
Which of the following is the correct equation for return on equity?
net income/ total equity
True or false: The dividend payout ratio equals cash dividends divided by sales.
False; Reason: The dividend payout ratio equals cash dividends divided by net income.
book value per share
equity/shares
Net working capital
CA-CL
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
created
The current ratio computes the relationship between ____.
current assets and current liabilities
The cash ratio is found by dividing cash by:
current liabilities
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
the blank__ payout ratio equals cash dividends divided by net income.
dividends
Dividends Per Share (DPS)
dividends paid to common stockholders / common shares outstanding
True or false: Inventory turnover is sales divided by inventory.
false; Reason: Inventory turnover is cost of goods sold divided by inventory.
True or false: The price-earnings ratio is price per share times earnings per share.
false; Reason: The price-earnings ratio is price per share divided by earnings per share.
True or false: Financial ratios are computed using only balance sheet information.
false; financial ratios can use information from all financial statements
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
false; if a company has inventory, the quick ratio will always be less than the current ratio
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
False Reason: If there is a conflict between market and accounting data, market data should be given precedence.
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
False; Reason: The DuPont identity is a popular expression breaking ROE into three parts.
The times interest earned ratio is a measure of long-term
solvency
True or false: The times interest earned ratio is EBIT minus interest.
False; Reason: The times interest earned ratio is EBIT divided by interest.