Financial Mgmt Ch 3

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

market value

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

performance evaluation

Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company's current liabilities total $5 million. The quick ration is ___.

.60 quick ration = (CA - Inv)/CL

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

1.15 Current ratio = CA/CL = 11300/(54800-45000)

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 time PE = price per share/EPS

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% Profit Margin = NI/Sales = .375/3.5

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. The firm's Days sales in inventory is:

146 Inv turnover = COGS/Inv days sales in inv = 365/Inv Turnover

A firm with a 26 percent return on equity earned ___ cents in profit for every one dollar shareholder's equity.

26

AD Corporation has a return on equity of 20% on total equity of $800,000. AD generated $1.6 million in sales on $2.7 million in assets. A DuPont decomposition of ROE shows the 20% return on equity is from an equity multiplier of ___.

3.38 EM = TA/TE

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 Rec Turnover = sales/AR

Alpha Manufacturing has interest expense of $12 million, total assets of $184 million, sales of $176 million, long-term debt of $16.4 million, an net income of $15 million. How ill interest expense be recorded in the common-size income statement?

6.82% 12/176 = .0682

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% x = 45/67

BC corporation has net income of $176,000, sales of $1,982,000, and total assets of $2.24 million. what is the return on assets?

7.86% ROA = NI/ TA

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

price-sales ratio

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

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

accounts payable cash

Which of the following is (are) true of financial ratios?

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

which of the following is (are) true of financial ratios?

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

Based on the DuPont Identity, an increase in sales, all else held equal, ___ ROE.

May not change May increase or decrease

Long-term solvency ratios are also known as:

financial leverage ratios

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30%, 34%, and 40%, respectively. This indicates that the firm has increased its ___.

leverage

Which of the following are traditional financial ratio categories?

profitability ratios turnover ratios financial leverage ratios

Last year, Benton Inc. had net income of $3.5 million and paid out $700,000 in cash dividends. If income this year is $4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

$820,000 div payout = dps/eps = div/ni = .2 .2 = x/4100000

What is the formula for computing internal growth rate (IGR)?

(ROA x b) / (1 - ROA x b)

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

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

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

(total assets - total equity)/(total assets)

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

further investigation examination of whether the increase is dues to declining inventory or increasing sales

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

income statement

An increase in a firm's total asset turnover will ___ the sustainable growth rate.

increase

If sales increase while there is not change in accounts receivable, the receivables turnover ratio will ___.

increase

If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:

less than 1

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 29-25%. This indicates the firm has increased its ___.

liquidity

Time-trend analysis is an example of

management by exception

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

market

Which of the following items is added back to EBIT while calculating the cash coverage ration but not while calculating the times interest earned ratio?

non-cash expenses

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

profitability

Financial statement analysis is primarily "management by ___."

Exception

Which of the following are traditional financial ratio categories?

Financial leverage ratios Turnover ratios Profitability ratios

Which one of the following does NOT affect ROE according to the DuPont Identity?

Investor sentiment

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

Net income/Total equity

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

depreciation

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.

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.

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.

True or False: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

Which of the following would help a company take action to improve its ratios?

comparing to major competitors Comparing to aspirant companies Comparing to peer companies Comparing to its own historical ratios

A firm with a market-to-book value that is greater than 1 is said to have ___ value for shareholders.

created

The cash ratio is found by dividing cash by

current liabilities