Finance Chapter 3 2018
gross profit margin
(sales-cogs)/sales
What does a dividend payout of 45 percent indicate?
A 45 percent dividend payout indicates a firm pays 45 percent of its net income available to common stockholders out in common dividends
Buster's has a debt ratio of 1.2. What does this imply?
A debt ratio of 1.2 means a firm is bankrupt
Which statement correctly interprets a sustainable growth rate of 4 percent?
A firm can grow by 4 percent annually without increasing its probability of incurring financial distress
Al's services has a current ratio of exactly 1.2 and a quick ratio of exactly 1.2. What does this mean
Al's has no inventory
Northern Goods and Southern Goods have similar levels of EBIT and depreciation. However, Northern Goods has a much higher cash coverage ratio. What does this mean?
Northern Goods is diluting its return to stockholders more than its competitors are
Kelso's has an average collection period of 49 days. How do you interpret this?
On average, Kelso's receives cash for a sale of 49 days after a credit sale occurs
Assume a firm has an equity multiplier of 1.2. Given this, what is the relationship between the internal growth rate and the sustainable growth rate?
Sustainable growth rate > Internal growth rate
The sustainable growth rate is based on
a constant debt ratio
dividend payout
common stock dividends/net income available to common stockholders
find ratio
current assets divided by current liabilities
The cash coverage ratio
measures the cash available to meet each dollar of interest and other fixed changes that a firm owes
profit margin
net income available to common stockholders/sales
return on assets(ROA)
net income available to common stockholders/total assets
return on equity(ROE)
net income available to common stockholders/total equity
cross-sectional analysis
performance of the firm against one or more companies in the same industry
time series analysis
performance of the firm over time
Assume you are given the values for sales, taxable income, preferred and common stock dividends, interest, and the tax rate. How would you calculate the profit margin?
profit margin = ((taxable income x (1-tax rate)) - preferred dividends)/Sales
financial leverage
refers to a firm's use of debt financing, which is measured by the debt ratio, debt to equity, and the equity multiplier
ROE =
Net income/Equity
equity multiplier
1 + debt to equity ratio
Which are correct versions of the return on equity?
1. ROE= profit margin x (1/capital intensity ratio)x(1+debt to equity) 2. ROE= profit margin x Total asset turnover x equity multiplier 3. ROE= ROA x (1+debt to equity)
debt management ratios are used to do what?
1. measure the capital structure of a firm 2. they determine the amount of financial leverage used by a firm 3. they determine whether or not a firm can meet its debt obligations
How is inventory turnover related to days' sales in inventory?
1. the shorter the inventory period, the higher the turnover rate 2. The lower the turnover rate, the more days' sales that are held in inventory
A firm has net income of $38000, preferred stock dividends of $10000, and common stock dividends of $8000. The firm has 10,000 shares of common stock outstanding that sells for $46 a share. What is the price-earnings (PE) ratio?
16.43
If you want to compare the operations of similar firms without the firm's capital structure or tax status affecting that comparison, which ratio should you use?
Basic earnings power
The suppliers of Denver Press offer the firm 30 days credit on all its purchases. Denver Press has an average payment period of 84 days as compared to its industry average of 43 days. What does this mean?
Denver Press is most likely abusing its credit terms
operating profit margin
EBIT/sales
basic earnings power (BEP)
EBIT/total assets
Two firms have the same return on equity (roe) for this year. Firm A retains 60 percent of its earnings as compared to Firm B's 40 percent. Which statement is correct?
Firm A has a higher sustainable rate of growth than firm B
Two firms have the same amount of assets and equity. Firm A has a market-to-book value of 3.6 compared to 2.9 for Firm B. What is true?
Firm A is expected to outperform Firm B in the future
What defines cross-sectional analysis?
It analyzes the performance of a firm against one or more companies in the same industry.
JJ's has a cash ratio of .25. How do you interpret this value?
JJ's has sufficient cash and marketable securities to pay its short-term obligations for three months.
When a company has a times interest earned ratio of 3.2, what does this mean?
The earnings before interest and taxes is 3.2 times greater than the firm's interest expense for the period.
What is a correct assumption given a firm with an increasing return on equity (ROE) for each of the past 5 years? Assume the firm's ROE currently equals the industry ROE.
The firm earned more profit per dollar of investment for its common stockholders last year than it did in the previous four years.
Lester's has a current ratio of .86. What does this indicate?
The firm has $0.86 in current assets for every $1 it must pay in obligations within the next year
Over the past 3 years, Art's Bakery has increased its debt and lowered its equity. Which one of these statements is most apt to apply to this firm?
The firm's safety cushion that helps absorb earnings fluctuations is diminishing
one company has a basics earnings power ratio of 1.6 and the other has 1.8. What does this mean?
The second company is generating more operating profit per dollar of assets than the first
a high price-earnings (PE) ratio indicates
greater risk
A levered firm's sustainable growth rate increased this year. Which one of these might have caused that increase, all else equal?
increase in operating efficiency and increase in financial leverage
What is the retention ratio?
the percentage of net income available to common stockholders that is added to retained earnings.
capital intensity ratio =
total assets/sales
