Finance Chapter 3

Alpha Manufacturing has interest expense of $1.2 million, total assets of $184 million, sales of $17.6 million, long-term debt of $16.4 million, and net income of $15 million. How will interest expense be recorded in the common-size income statement?

6.82% 1.2m/17.6m

Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expressed on a common-size balance sheet?

67% 45m/67m= 67%

Which two of the following groups are most interested in liquidity ratios?

Bankers Suppliers

How is inventory turnover calculated?

COGS/Inventory

Financial statements are used to:

Communicate financial information to outsiders. Assess a company's current financial position. Communicate financial information within a firm.

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Differing fiscal years Differing accounting methods Seasonality

A times interest earned (TIE) ratio of 3.5 times means a firm has ___ that is(are) 3.5 times greater than the firm's interest expense.

Earnings before interest and taxes

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

Financial Statements

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

Increase.

What will happen to the current ratio if current assets increase, while everything else remains the same?

It will increase

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___ time to sell.

Long

Total capitalization equals total equity plus total:

Long term Debt

What ratios use some information that is not contained in financial statements?

Market value ratios

Return on Assets (ROA)

Net Income/Total Assets

Alpha has assets of $102 million, net income of 4.3 million, and total sales of 97 million. Omega has assets of 12.4 million, net income of .76 million, and total sales of 9.3 million. Based on common-size income statements, which company is more profitable?

Omega Alpha: 4.3m/97 = 4.4% Omega: .76m/9.3m = 8.2%

Which of the following are traditional financial ratio categories?

Profitability ratios Asset management ratios Market value ratios

The profit margin is equal to net income divided by ___.

Sales

Which of the following equations defines the total asset turnover ratio?

Sales/Total assets

At the most fundamental level, firms generate cash and:

Spend it

___ financial statements provide for comparison of firms that differ in size

Standardized

Which one of the following is one way in which financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

T/F: A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both withing and outside the firm.

True

T/F: The interval measure indicates how long a start-up company can operate until it needs more financing.

True

The cash ratio is found by dividing cash by:

current liabilities

A(n) ___ in net profit margin will increase ROE.

increase

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

market value

Total Debt Ratio

(Total Assets - Total Equity) / Total Assets

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

.60 (9.2m -4.3m)/8.1m

If Marley Company has a stock price of $12 per share, 100,000 shares outstanding, $432000 in liabilities and 100000 in cash, what is its enterprise value?

1,532,000 ((12 x 100000)+432000-100000))

What is the debt-equity for a company with $3.5 million in total assets and $1.4 million in equity?

1.50 (3.5-1.4)=2.1 2.1/1.4=1.50

Nestor's has net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

15.91% 315000/1.98m

BK Trucking has total equity of 25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?

2.25 38/(25380/1500)

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. What is the return on assets?

27.23% = 403000/1.48m

Better Life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. The firm's receivable turnover is ___ times.

5

Return on equity (ROE) is a measure of ___.

profitability

Alpha Co. has interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?

1.58% 1.2m/76m

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

10 times ($30/$3)

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

10.71% 375000/3.5m

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times $18/(2700/1800)

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?

20.18% 51750/(523400-267000)

Alpha Co. has cost of goods sold of 61.2 million, net income of 9.6 million, sales of 120 million, and total assets of 150 million. A common size income statement will show cost of goods sold of ___ percent and a net profit of ___ percent.

51 ; 8

How are firms classified into peer groups for ratio analysis?

According to Standard Industrila Classification codes

Although ___ ___ are often poor reflections of reality, they are often the best information available.

Accounting numbers

Which of the following are sources of cash?

An increase in notes payable A decrease in AR

Financial managers use a common-size income statement to determine ___.

Which costs are rising or falling as a percentage of sales.

How is market-to-book ratio measured?

market value per share/book value per share

A firm has a total debt ratio of .30 times. This means the firm has ___ in total assets.

.30

Jensen's has $800 in total assets and 540 in total equity. What is the total debt ratio?

.33 (800-540)/800

Which of the following items are among the items used to compute the current ratio?

Cash AP

An important accounting goal is to report financial information to users in a way that is useful for ___.

Decision making

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

Depreciation

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 respectively. Explaining the upward trend in the inventory turnover ratio requires:

Further investigation

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

Market

The EBITDA ratio is similar in spirit to:

PE ratio

One of the most important uses of a financial statement within the firm is:

Performance evaluation

AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets.

Profit Margin: 10% = 20%/(1.6m/.8m) ROA: 5.93% = 20%/(2.7m/.8m) Equity Multiplier: 3.38 times = 2.7m/.08m