Finance - Test 3

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

Quick Ratio (Acid Test) =

(Current Assets - Inventory) / Current Liabilities

A firm's ability to sustain growth depends explicitly on the following four factors:

1. profit margin 2. total asset turnover 3. financial policy 4. dividend policy

financial ratios are traditionally grouped into the following categories

1. short-term solvency, or liquidity, ratios 2. long-term solvency, or financial leverage, ratios 3. asset management, or turnover, ratios 4. profitability ratios 5. market value ratios

suppose you find that a particular company generates $0.40 in sales for every dollar in total assets. How often does this company turn over its total assets?

1/.4 = 2.5 years to turn assets over completely

An angel investor is willing to give you $250,000 to help your company explode. In return the investor wants $60,000 next year, and then a smaller amount every year, forever. The amount will shrink by 10% each year. What discount rate is your angel investor using?

14%

if a stock cost $37 and its next dividend is expected to be $4.50 (dividends are expected to grow by 2% indefinitely), what is the discount rate?

14.16%

A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?

14.45 percent

Use the following information to answer this question. Bayside, Inc.2017 Income Statement($ in thousands)Net sales$6,090 Cost of goods sold 4,300 Depreciation 410 Earnings before interest and taxes$1,380 Interest paid 34 Taxable income$1,346 Taxes 404 Net income$942 Bayside, Inc.2016 and 2017 Balance Sheets($ in thousands) 2016 2017 2016 2017 Cash$125 $230 Accounts payable$1,630 $1,580 Accounts rec. 1,030 870 Long-term debt 830 630 Inventory 1,745 2,060 Common stock 3,280 3,300 Total$2,900 $3,160 Retained earnings 900 1,150 Net fixed assets 3,740 3,500 Total assets$6,640 $6,660 Total liab. & equity$6,640 $6,660 What is the return on equity for 2017?

21.17%

Rogers Radiators has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

8.95 percent

Lee Sun's has sales of $3,500, total assets of $3,200, and a profit margin of 5 percent. The firm has a total debt ratio of 41 percent. What is the return on equity?

9.27 percent

Inventory Turnover

cost of goods sold/inventory

Net Working Capital =

current assets - current liabilities

EBIT

earnings before interest and taxes

EBITD

earnings before interest, taxes, and depreciation

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets

a firm has two broad sources of financing:

internal and external

Return on Equity

is a measure of how the stockholders fared during the year

Return on Assets

is a measure of profit per dollar of assets

why is it often necessary to standardize financial statements?

its almost impossible to directly compare the financial statements for two companies because of differences in size

the cash ratio is used to evaluate the:

liquidity of a firm

Market to Book Ratio

market value per share/book value per share

operating efficiency

measured by profit margin

profit margin

net income/net sales

Earnings Per Share (EPS) =

net income/shares outstanding

Price/Earnings (P/E) Ratio =

price per share/earnings per share

Price-Sales Ratio =

price per share/sales per share

Short-Term Solvency Ratio

provide information about a firm's liquidity. focus of current assets and current liabilities

what is the difference between EAR and APR that compounds weekly and rate of 4.20%

104.29-104.2 =0.09 or 9 basis points

A firm has sales of $1,080, net income of $212, net fixed assets of $516, and current assets of $272. The firm has $87 in inventory. What is the common-size balance sheet value of inventory?

11.04%

Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is .40. What is the return on equity?

12.67 percent

Computer Geeks has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity?

21.55 percent

Baker Boy will set aside $1,000 at the end of each quarter to save for retirement. He expects a 9% return and already has $5,000 saved up. How much will Baker Boy have in his retirement account in ten years?

$75,962.12

For prufrock corporation, we earlier calculated ROA as 13.06 percent. We also saw that the retention ratio is 66.67 percent, so the internal growth rate is:

(.1306 x .6667) / (1 - .1306 x .6667) = .0954 or 9.54%

we earlier calculated ROE as 18.06 percent, adn we know that the retion ratio is 66.67 percent, so we can easily calculate sustainable growth as:

(.1806 x .6667) / (1 - .1806 x .6667) = .1369 or 13.69%

Cash Coverage Ratio =

(EBIT + Depreciation) / Interest

sustainable growth rate =

(ROE x b) / (1 - ROE x b)

total debt ratio =

(Total Assets - Total Equity) / Total Assets

Use the following information to answer this question. Bayside, Inc.2017 Income Statement($ in thousands)Net sales$6,220 Cost of goods sold 4,540 Depreciation 390 Earnings before interest and taxes$1,290 Interest paid 42 Taxable income$1,248 Taxes 437 Net income$811 Bayside, Inc.2016 and 2017 Balance Sheets($ in thousands) 2016 2017 2016 2017 Cash$140 $245 Accounts payable$1,685 $1,735 Accounts rec. 1,110 950 Long-term debt 870 670 Inventory 1,785 2,120 Common stock 3,360 3,340 Total$3,035 $3,315 Retained earnings 940 1,190 Net fixed assets 3,820 3,620 Total assets$6,855 $6,935 Total liab. & equity$6,855 $6,935 How many dollars of sales were generated from every dollar of fixed assets during 2017?

$1.72

Around 1984 I was with my dad when he went to purchase a new Fiat. My dad wanted to discuss the terms for a car payment, the interest rate and length of the loan, but the salesman said those terms were unimportant. He said that only the price of the car mattered. So, my dad offered one million dollars for the car, one dollar a year for the next million years. That would be a zero percent interest rate and one million years to pay off the loan. The salesman did not like those terms, even though the price was extreme. If the Fiat dealership had a 10% discount rate, how much was my dad's offer worth?

$10

Why evaluate financial statements? external use

- short-term and long-term creditors and potential investors - evaluate suppliers, and suppliers would use our statements before deciding to extend credit to us.

problems with financial statement analysis

- there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks - this is why we can't say which ratios matter the most and what a high or low value might be - many firms own more or less unrelated lines of business - always works best when the firms are strictly in the same line of business - major competitors and peer groups may be scattered all around the globe

Use the following information to answer this question. Windswept, Inc.2017 Income Statement($ in millions)Net sales$12,650 Cost of goods sold 7,900 Depreciation 490 Earnings before interest and taxes$4,260 Interest paid 98 Taxable income$4,162 Taxes 1,457 Net income$2,705 Windswept, Inc.2016 and 2017 Balance Sheets($ in millions) 2016 2017 2016 2017 Cash$250 $280 Accounts payable$1,780 $1,730 Accounts rec. 1,090 990 Long-term debt 1,060 1,380 Inventory 1,970 1,720 Common stock 3,340 3,030 Total$3,310 $2,990 Retained earnings 640 890 Net fixed assets 3,510 4,040 Total assets$6,820 $7,030 Total liab. & equity$6,820 $7,030 What is the fixed asset turnover for 2017?

3.13 times

Days' Sales in Inventory

365/inventory turnover

Days' Sales in Receivables

365/receivables turnover

Al's Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm's return on assets?

7.27 percent

common-size statement

A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.

Rainy is making a plan to save for retirement, which is fifteen years away. She wants $350,000 in the account and only has $32,000 today. Rainy will make her first monthly contribution of $800 today. What rate of return does Rainy need to earn?

APR = 7.1%

An angel investor is willing to give you $250,000 to help your company explode. In return the investor wants $60,000 next year, and then a smaller amount every year, forever. The amount will shrink by 10% each year. The investor is using a discount rate of 14%. Although the angel states the cash flows should continue forever, the angel wants a buy-out in seven years, this will require you to give the angel the value of the remaining perpetuity in seven years. How much cash will you give to the angel investor each of the next seven years?

CF1: $60,000 CF2: $54,000 CF3:$48,600 CF4: $43,740 CF5: $39,366 CF6: $35429.40 CF7: $31,886.46 PV7=$119,574.23 Angel7=$151,460.69

cash ratio =

Cash / Current Liabilities

Dividend payout ratio =

Cash Dividends/Net Income

Peer Group Analysis

Compare to similar companies or within industries

times interest earned ratio =

EBIT/Interest

EBITDA

Earnings before interest, taxes, depreciation, and amortization

EBITDA ratio

Enterprise Value / EBITDA

long term solvency ratios

Intended to address the firm's long-term ability to meet its obligations, or more generally, its financial leverage.

return on equity =

Net Income/Total Equity

Why Evaluate Financial Statements? Internal uses

Performance evaluation - compensation and comparison between divisions Planning for the future - guide in estimating future cash flows

Receivables Turnover

Sales / Accounts Receivable

Total Asset Turnover

Sales/Total Assets

Average Collection Period

The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.

aspirant group

Top firms in an industry because we aspire to be like them

Equity Multiplier =

Total Assets/Total Equity

debt-equity ratio =

Total Debt/Total Equity

Standard Industrial Classification (SIC)

U.S. government code used to classify a firm by its type of business operations

Time-Trend Analysis

Used to see how the firm's performance is changing through time

Amortization

a non-cash deduction similar conceptually to depreciation, except it applies to an intangible asset (such as a patent) rather than a tangible asset (such as a machine)

liquidity measures

ability to meet current maturing debts

Retention Ratio (Plowback Ratio)

addition to retained earnings / net income

financial leverage

as measured by the equity multiplier

asset use efficiency

as measured by total asset turnover

external financing

refers to funds raised by either borrowing money or selling stock

Financial Ratios

relationships determined from a firm's financial information and used for comparison purposes

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year

Twenty-five dollars a week for twenty-five years and you can be a millionaire with an APR of 20.26%. If you started with $100 and could only get ten percent, how much would you need to invest each week to reach one million dollars in twenty-five years? What if you started with $1,000? Or, $10,000? Or, even $100,000?

start with $1000: $170.33 start with $10000: $151.47 start with $100,000: $37.13

Total Debt Ratio

takes into account all debts of all maturities to all creditors

inventory is

the least liquid current asset

Sustainable Growth Rate

the maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio

internal growth rate

the maximum growth rate a firm can achieve without external financing of any kind

capital intensity ratio

the reciprocal of (that is 1 divided by) total asset turnover

Common-size financial statements present all balance sheet account values as a percentage of:

total assets

enterprise value =

total market value of the stock + book value of all liabilities - cash

if interest rates do not change and the dividends continue to rise as expected, what will be the stock price next year? discount rate = 7.25% C0 = $210 g = 4.1%

$72.25

we assume that prufrock has $33 million shares outstanding and the stock sold for $115 per share at the end of the year. If we recall that Prufrock's net income was $474 million, then we can calculate that its earnings per share were:

$14.36 million

Twenty-five dollars a week for twenty-five years and you can be a millionaire with an APR of 20.26%. If you started with $100 and could only get ten percent, how much would you need to invest each week to reach one million dollars in twenty-five years?

$172.21

A four-year car loan of $23,000 has an interest rate of 6.00%. Suppose Grover Girl will make $600 payments, all that is required is $540.16, to pay it off early. How much will she owe after three years?

$3,921.99

Suppose that a dying man purchases a perpetuity to pass on to his wife and children after his death. He has $650,000 and interest rates are 8.00%. He would like the cash flows to keep up with inflation, 2.30%. How large would the first cash flow be?

$37,050

Suppose that a dying man purchases a perpetuity to pass on to his wife and children after his death. He has $650,000 and interest rates are 8.00%. How large of a perpetuity can he purchase?

$52,000

A woman is considering purchasing a growing perpetuity that just made an annual payment of $4,500. These payments will grow by 3.2% each year. If she puts a discount rate of 11.00% on these payments, how much is she willing to pay for them?

$59,538.46

how much should a stock sell if the appropriate discount rate is 7.25%. If just paid a dividend of $2.10 and the dividends are expected to rise by 4.1% each year.

$69.40

A firm has total debt of $1,380 and a debt-equity ratio of .23. What is the value of the total assets?

$7,380.00

Prufrock had a cost of goods sold of $1,344. Inventory at the end of the year was $422. With there numbers, inventory turnover is

3.18 times

Profrock's net income was $474, of which $158 was paid out in dividends. If we express dividends paid as a percentage of net income, the result is the dividend payout ratio:

=.3333, or 33.33%

internal growth rate =

ROA x b /( 1 - ROA x b)

internal financing

Refers to what the firm earns and subsequently plows back into the business

Payables Turnover =

cost of goods sold / accounts payable

Current Ratio =

current assets / current liabilities

asset utilization ratios

measures of turnover

Rainy decides she is willing to wait until she has $500,000 to retire. She only has $32,000 right now and will make monthly contributions of $800, starting immediately. If Rainy hopes to earn 7.50% interest, how many years will she need to wait to retire?

months = 218.87 years = 18.24

return on assets =

net income/total assets

DuPont Identity

popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage


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