Chapter 3

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?

Cash

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

Base-year accounts receivables.

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?

Decrease in the day's sales in inventory.

Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover.

If a firm produces a 13 percent return on assets and also a 13 percent return on equity, then the firm:

Has an equity multiplier of 1

Which one of the following statements is correct?

Historical information is useful when projecting a firm's future performance.

An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover. II. Net income. III. Total assets. IV. Debt-equity ratio.

I, II, and IV only.

Which one of the following is a source of cash for a non-tax-paying firm?

Increase in the common stock

Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market to book ratio?

Market to book ratio = Market value per share / Book value per share Tobin's Q ratio = Market value of assets / Replacement cost of assets 0.96 (225,000) = market value of assets = 216,000 Market value of equity = Assets - Liabilities = 216,000 - 101,000 = 115,000 Market value per share = Market value of equity / number of shares outstanding = 115,000 / 20,000 = 5.75 Market to book ratio = 5.75 / 2.09 = 2.75

A firm generated net income of $911. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?

Net cash from operating activities = $911 + 47 + 15 − 28 + 14 = $959

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?

Net working capital to total assets = NWC/total assets NWC = assets - liabilities = (7,950 + 1,263 + 3,907) - 2,214 = 10,906 Total assets = 7,950 + 1,263 + 8,400 + 3,907 = 21,520 NWC/total assets = 0.51

The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations?

Payment of interest to a lender.

Bernice's has $823,000 in sales. The profit margin is 3.9 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $15. What is the price-earnings ratio?

Price-earnings ratio = Price per share / earnings per share Earnings per share = (Profit margin x sales) / number of shares = .039(823,000) / 7,500 = 4.28 Price-earnings ratio = 15/4.28 = 3.51

Taylor's Men's Wear has a debt-equity ratio of 56 percent, sales of $829,000, net income of $38,300, and total debt of $206,300. What is the return on equity?

ROE = Net income/total equity Total equity = 206,300/0.56 = 368,392.86 ROE = 38,300/368,392.86 = 0.104

Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio?

ROE = Profit margin x Total asset turnover x Debt-equity ratio 16.2 = 5.1 x 1.84 x Debt-equity 16.2/9.384 = 1.73

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

Standard Industrial Classification codes.

Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?

3.32 percent