FINANCE CH 3

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)

What is the formula for computing a firm's sustainable growth rate?

(ROE × b)/(1 − ROE × b)

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

10 cents

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

365/receivables turnover

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

______ are the prime source of information about a firm's financial health.

Financial statements

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.

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

How is the market-to-book ratio measured?

Market value per share/Book value per share

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

Net income/Total equity

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

______ financial statements enable one to compare firms that differ in size.

Standardized

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.

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.

Which of the following create problems with financial statement analysis?

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

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

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

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

Time-trend analysis is an example of:

management by exception

The price-earnings (PE) ratio is a ______ ratio.

market value

A firm may use a price-sales ratio when it has had ____ (negative/positive) 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

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

price-sales ratio

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

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

The DuPont identity breaks ROE into ____ parts.

three

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

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

true

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

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

(Total assets - Total equity)/(Total assets)

True or false: Financial ratios are computed using only balance sheet information.

false

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

false

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

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: The price-earnings ratio is price per share times earnings per share.

false

True or false: The times interest earned ratio is EBIT minus interest.

false

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

false

Long-term solvency ratios are also known as:

financial leverage ratios.

Given an internal growth rate of 3 percent, a firm will

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

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

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

market

The price-earnings ratio is ____ per share divided by ____ per share.

prince, earnings

Return on assets (ROA) is a measure of

profitability

True or false: The cash ratio is found by dividing cash by current liabilities.

true

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

true

Common-size statements are best used for comparing:

year-to-year for your firm. firms of different sizes. competitors.

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 true of financial ratios?

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

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

Total Assets

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 of 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