FINC Ch4 Smartbook

A long-term debt ratio of 40% states that

$0.40 cents of every dollar of long-term capital is in the form of debt.

ABC Corporation has current assets of $50,000, total assets of $150,000, current liabilities of $35,000, total liabilities of $90,000, and shareholders' equity of $25,000. What is ABC Corporation's net working capital worth?

$15,000 Reason: Net working capital = current assets - current liabilities = $50,000 - $35,000 = $15,000

XYZ Corporation has a return on capital of 16% and a cost of capital of 6%. How much did XYZ earn in excess of investors' requirements?

10% 16-6=10

Which of the following ratios shows the dollar value of current assets for every dollar in current liabilities?

Current ratio

Which of the following ratios shows the percent of long-term capital that is financed by debt?

Long-term debt ratio

Return on capital is equal to

after-tax operating income divided by total capitalization

Liquid assets are those that can be quickly converted to _______.

cash

When determining if a ratio is good or bad, managers look at industry norms in order to

compare their measures with the measures of companies in the same line of business.

The inventory turnover ratio is equal to

cost of goods sold divided by inventory at the start of the year

The current ratio is equal to

current assets divided by current liabilities

Most firms would prefer both high profit margin and high turnover; however, this strategy typically leads to lower sales per dollar of assets. The Du Pont formula can help companies

determine if they should pursue a high profit margin/low turnover strategy determine if they should pursue a high turnover/low profit margin strategy Identify the constraints firms face

In good times, financial leverage _____ returns to shareholders.

increases

The average days in inventory ratio is equal to

inventory divided by daily cost of goods sold

The quick ratio is equal to

quick assets divided by current liabilities

Economic value added is also referred to as

residual income.

The receivables turnover ratio is equal to

sales divided by receivables

The asset turnover ratio is equal to

sales divided by total assets

An average days in inventory ratio of 30 states that

the company has inventory to maintain operations for 30 days

Which of the following statements are possible explanations for a high receivables turnover number?

the firm has a restrictive credit policy the firm has an efficient credit department that is quick to follow up on late payers unpaid bills are a small proportion of sales

DEF Corporation has $40,000 in cash, $22,000 in marketable securities, $8,000 in receivables, and $160,000 in current liabilities. What is DEF Corporation's quick ratio?

.44 Reason: Quick ratio = ($40,000 + $22,000 + $8,000) / $160,000 = .44

ABC Corporation has total liabilities of 45,500 and total assets of $63,900. Its total debt ratio is:

.712 Reason: $45,500/$63,900=.712

ABC Corporation has current assets of $50,000, total assets of $150,000, current liabilities of $35,000, total liabilities of $90,000, and shareholders' equity of $25,000. What is ABC Corporation's current ratio?

1.43 Reason: Current ratio = current assets/current liabilities = $50,000/$35,000 = 1.43

ABC Corporation had sales of $4,000,000 and receivables of $350,000. ABC's receivables turnover ratio is _____.

11.43 Reason: Receivables turnover = sales/ receivables = $4,000,000/$350,000= 11.43

ABC Corporation had sales of $125,000. Total assets at the beginning the year were 53,000 and at the end of the year were $55,000. ABC's asset turnover for the entire year was _____. (Use the average total assets to solve)

2.31 Reason: Sales/average total assets = $125,000/(($53,000+$55,000)/2)

ABC Corporation has long-term debt of $100,000 and equity of $160,000. ABC's long-term debt ratio is _____.

38.5% Reason: Long-term debt ratio = long-term debt/(long-term debt + equity) = $100,000 / ($100,000 + $160,000) = .385 0r 38.5%

ABC Corporation had $370,000 in inventory at the start of the year and daily cost of goods sold of $8,220. ABC's average days in inventory is _____.

45.01 Reason: 37000/8220=45.01

ABC Corporation has long-term debt of $100,000 and equity of $160,000. ABC's long-term debt-equity ratio is _____.

62.5% Reason: Long-term debt-equity ratio = long-term debt/equity = $100,000/$160,000 = .625 or 62.5%

ABC Corporation had net income of $75,000 and sales of $1,000,000. ABC's profit margin is _____.

7.5% Reason: Profit margin = net income / sales = $75,000 / $1,000,000 = .075 or 7.5%

ABC Corporation had $3,000,000 in cost of goods sold and $370,000 in inventory. ABC's inventory turnover is _____.

8.11 Reason: Inventory turnover = cost of goods sold/inventory = $3,000,000/$370,000= 8.11

Which of the following are considered advantages of using EVA and Accounting rates of return over market-value based measures?

Can be calculated for a particular division Show current performance Not affected by economic factors that move stock market prices

When it comes to financial ratios and assessing company performance, management usually look at which of the following?

Comparing ratios with companies in the same line of business How the company's financial ratios have changed over time

The long-term debt-equity ratio is a measure of:

leverage

When loaning money, creditors are interested in the borrower's financial leverage as well as their

liquidity

The long-term debt-equity ratio is equal to

long-term debt divided by equity

The long-term debt ratio is equal to

long-term debt divided by long-term debt plus equity

The profit margin is equal to

net income divided by sales

Economic value added is equal to

net income minus the cost of capital.

Economic value added is defined as the

profit after deducting all costs, including the cost of capital.

The total debt ratio is equal to

total liabilities divided by total assets

Market capitalization is defined as the

total market value of the firm's equity.

Which of the following ratios shows how much sales are generated by each dollar of total assets?

Asset turnover ratio

Which of the following are considered disadvantages of using EVA and Accounting rates of return over market-value based measures?

Assets could be grossly undervalued Current market values of assets are not considered

Which of the following ratios shows the number of days in which a company has sufficient inventories to maintain operations?

Average days in inventory

Which of the following ratios shows the extent to which interest obligations are covered by earnings?

Times interest earned ratio

XYZ Corporation's shares are selling for $50 a share and the number of shares currently outstanding is 1,000. XYZ's market capitalization is:

$50,000 Reason: Market capitalization = share price x number of outstanding shares = $50 x 1,000 = $50,000

Which of the following refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity?

Financial leverage

Which of the following represent questions the financial manger would ask to evaluate investment decisions? (Do not confuse the investment decision with the financing decision)

How should profitability be measured? How profitable are investments relative to the cost of capital?

Which of the following ratios measure the firm's efficiency with which it uses its assets?

Inventory turnover Asset turnover

Which of the following represent questions the financial manger would ask to evaluate financing decisions? (Do not confuse the financing decision with the investment decision)

Is the financing strategy prudent? Does the firm have sufficient liquidity?

Which parts of the return on equity equation depend on the firm's financing mix (its debt-equity mix)?

Leverage ratio Debt burden

Which of the following figures shows the company's potential net reservoir of cash?

Net working capital

According to the Du Pont System, return on assets is dependent upon which of the following two factors?

Operating profit margin Asset turnover

Which of the following ratios measures the proportion of sales that finds its way into profits?

Profit margin

Which of the following ratios shows the amount of quick assets for every dollar of current liabilities?

Quick ratio

Which of the following ratios shows the number of times outstanding credit accounts are collected during the year?

Receivables turnover

Which part of the return on equity equation depends on the firm's production and marketing skills, not the firm's financing mix?

Return on assets

Which of the following are helpful for measuring the firm's profits per dollar of assets?

Return on equity Return on assets Return on capital

Net working capital of $4,000 states that the company's

current assets exceed current liabilities by $4,000

Net working capital is equal to

current assets minus current liabilities

An asset turnover ratio of 2.10 states that

each dollar of assets produced $2.10 in sales

Return on capital and return on assets are used instead of _____ to compare managers whose assets differ in size.

economic value added

Asset turnover, inventory turnover, and receivables turnover are all ratios used to measure a firm's __________.

efficiency

A quick ratio of .50 states that

for every dollar in current liabilities the company has $0.50 cents in quick assets

A current ratio of 2 states that

for every dollar in current liabilities the company has $2 in current assets

A profit margin of 7% states that

for every dollar in sales the company generates $0.07 cents in profit

A highly leveraged company will have a long-term debt-equity ratio that is _________ a less leveraged company.

higher than

A times interest earned ratio of 5 states that

income before interest and taxes covers the interest obligation 5 times.