Finance 311 Chapter 3 Smartbook

A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.

10 cents

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

365 days/receivables turnover

The cash ratio is found by dividing cash by

Current liabilites

T/F: Financial ratios are computed using only balance sheet information

False

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?

It will increase

Long-term solvency ratios measure what aspect of the firm's financial position?

Its financial leverage

Profit margin equation

Net income/sales

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

Total asset turnover

Sales/Total Assets

The times interest earned ratio is a measure of long-term ____________.

Solvency

________ 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.

Which are used to compute the current ratio?

current assets and current liabilities so cash and accounts payable

The price earnings ratio is a _______ ratio

market value

How is the market-to-book ratio measured?

market value per share/book value per share

The price earnings ratio

price per share/earnings per share

The DuPont identity shows that _________ ___________ times total asset turnover times equity multiplier equals ROE

profit margin

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 or revenue

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

total assets

A firm may use a price-sales ratio when it has had

Negative

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.

Current assets on the common-size balance sheet over the past three 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 ______.

liquidity

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

price-sales ratio

The DuPont identity breaks ROE into _________ parts

three

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

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

Depeciation

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

Income statement

Short-term solvency ratios are also called ________ ratios.

Liquidity

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.

T/F: The times interest earned ratio is EBIT minus interest.

False; EBIT/interest

T/F: Inventory turnover is sales divided by inventory.

False; cost of goods sold/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 ______ the current ratio.

Less than

How is the price earnings (PE) ratio computed?

Market price per share/earnings per share

Return on Assets (ROA)

Net income/total assets

Return on equity (ROE)

Net income/total equity

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

Profitability

Receivables Turnover Ratio

Sales/accounts receivable

Which of the following are traditional financial ratio categories? financial leverage competition turnover profitability real options

financial leverage turnover profitability

Long-term solvency ratios are also known as

financial leverage ratios

The current ratio computes the relationship between __________.

Current assets and current liabilities

T/F: 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

T/F: If a company has inventory, the quick ratio will always be greater than the current ratio.

False

T/F: The current ratio will decrease if current assets increase, while everything else remains unchanged.

False

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

(Total-assets-Total Equity)/(Total assets)

Cash coverage ratio

(EBIT+Depreciation)/Interest

Which of the following is (are) true of financial ratios: They are computed in the same manner They only use balance sheet data They are developed by a firm's financial info They always reflect market values They are used for comparison purposes

They are developed from a firm's financial information They are used for comparison purposes

T/F: The cash ratio is found by dividing cash by current liabilities.

True

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

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

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _____________ available to pay interest.

Cash

T/F: In a common-size income statement, each item is expressed as a percentage of total sales.

True

T/F: The total debt ratio equals the total assets minus total equity all over total assets.

True