FIN219T Business Finance Ch. 3
True or false: Receivables turnover is cost of goods sold divided by accounts receivable
False
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged
False
True or false: The dividend payout ratio equals cash dividends divided by sales
False
True or false: Where there is a conflict between market and accounting data, accounting data should be given precedence
False
True or false: the times interest earned ratio is EBIT minus interest
False
Which of the following are traditional financial ratio categories?
Financial leverage ratios, turnover ratios, profitability ratios
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 increase or decrease
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
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 x b)/(1-ROA x b)
What is the formula for computing a firm's 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 DuPoint identity is a popular expression breaking ROA into three parts
False; ROE
True or false: financial ratios are computed using balance sheet information
False; 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; less than
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio
False; less than
Which of the following represents the receivables turnover ratio?
Sales/accounts receivable
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
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
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: The cash ratio is found by dividing cash by current liabilities
True
True or false: the debt-equity ratio equals the total assets minus total equity all over total assets
True
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
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ____ available to pay interest
cash
Which of the following items are used to compute the current ratio?
cash, accounts payable
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 measure of how much cash is available to meet interest obligations
depreciation
Return on assets equals net income ____ by total assets
divided
The ___ payout ratio equals cash dividends divided by net income
dividend
Financial statement analysis is primarily "management by ___"
exception
True or false: inventory turnover is sales divided by inventory
false
True or false: the retention ratio equals one minus the ROA
false
True or false: there is a solid and prescriptive method to select which ratios to use in financial statement analysis
false
True or false: the price-earnings ratio is price per share times earnings per share
false; divided by
True or false: Market-to-book ratio equals book value per share divided by market value per share
false; market value/book value
Long-term solvency ratios are also known as
financial leverage ratios
Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
financial policy, profit margin, dividend policy
___ are the prime source of information about a firm's financial health
financial statements
Given an internal growth rate of 3 percent, a firm can
grow by 3 percent or less without any additional external financing
The information needed to compute the profit margin can be found on the
income statement
An increase in profit margin will ___ a firm's sustainable growth rate
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will
increase
Which one of the following does not affect ROE according to the DuPont identity?
investor sentiment (Affects operating efficiency, financial leverage, asset use efficiency)
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
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
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 ____ ratios
liquidity
Short-term solvency ratios are called _____ ratios
liquidity
Time-trend analysis is an example of
management by exception
Whenever ___ information is available, it should be used instead of accounting data
market
How is the price-earnings (PE) ratio computed?
market price per share / earnings per share
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
The retention ratio equals one ___ the dividend payout ratio
minus
A firm may use a price-sales ratio when it has had ___ earnings over the past year
negative
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
The DuPont identity shows that _____ times total asset turnover times equity multiplier equals ROE
net profit margin
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
___ 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
If a company has had negative earnings for several periods they might choose to use a
price-sales ratio
If a company has had negative earnings for several periods they might choose to use a ____
price-sales ratio
The price-earnings ratio is ____ per share divided by ___ per share
price; earnings
Return on assets (ROA) is a measure of
profitability
Return on equity (ROE) is a measure of
profitability
Which of the following are traditional financial ratio categories?
profitability ratios, turnover ratios, financial leverage ratios
Receivables turnover is ____ divided by accounts receivable
sales
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
The times interest earned ratio is a measure of long-term
solvency
Which of the following would help a company take action to improve its ratios?
comparing to its own historical ratios, comparing to peer companies, comparing to major competitors, comparing to aspirant companies
Which of the following would help a company take action to improve its ratios?
comparing to peer companies, comparing to major competitors, comparing to its own historical ratios, comparing to aspirant companies
A firm with a profit margin of 10% generates ___ in net income for every dollar in sales
10 cents
A firm with a 26 percent return on equity earned ___ cents in profit for every one dollar in shareholders' equity
26
Days' sales in receivables is given by the following ratio
365/Receivables turnover
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
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
How is the inventory turnover ratio computed?
Cost of goods sold/inventory
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
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 is (are) true of financial ratios?
they are developed from a firm's financial information, they are used for comparison purposes
The DuPont Identity breaks ROE into ____ parts
three
True or false: it is important to investigate trends in financial ratios to identify the reason for the trend
true
True or false: profit margin equals net income divided by sales
true
