FIN: Chapter 3

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Cash Coverage Ratio

(EBIT + Depreciation) / Interest

What is the formula for computing the 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)

Total Debt Ratio

(Total Assets - Total Equity) / Total Assets

debt-equity ratio

(total assets - total equity) / total assets

Days' sales in receivables is given by the following ratio:

365/Receivables turnover

T or F? If there is a conflict between market and accounting data, accounting data should be given precedence.

False

T or F? The dividend payout ratio equals cash dividends divided by sales.

False

T or F? There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

False

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

return on assets (ROA)

Net Income / Total Assets

return on equity

Net Income / Total Equity

Financial ratios are

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

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3 percent or less without any additional external financing

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

income statement

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

increase

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

Time-trend analysis is an example of

management by exception

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

market

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

market value

How is the market-to-book ratio measured?

market value per share / book value per share

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

may not change may increase or decrease

Profit Margin Formula

net income / sales

The DuPoint identity shows that ________________ times total asset turnover times equity multiplier equals return on equity (ROE)

net proft margin

price-earnings (PE) ratio

price per share / earnings per share

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

profitability

In a common-size income statement, each item is expressed as a percentage of total

sales

Recieveables turnover ratio

sales / accounts receivable

The times interest earned ratio is a measure of long-term

solvency

A common-size balance sheet expresses accounts as a percentage of ______.

total assets

A firm with a profit margin of 10% generates ______ in net income for every dollar in sales

10 cents

Cash ratio formula

Cash / Current Liabilities

Times Earned Interest

EBIT / interest expense

What creates problems with financial statement analysis?

The firm and its competitors operate under different regulatory environments. The firm or its competitors are global companies. The firm or its competitors are conglomerates

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.

Why do financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

T or F? It is important to investigate trends in financial ratios to identify the reason for the trend.

True

Inventory Turnover

cost of goods sold / inventory

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

created

The current ratio computes the relationship between ____.

current assets and current liabilities


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