FIN219T Business Finance Ch. 3

True or false: Receivables turnover is cost of goods sold divided by accounts receivable

False

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged

False

True or false: The dividend payout ratio equals cash dividends divided by sales

False

True or false: Where there is a conflict between market and accounting data, accounting data should be given precedence

False

True or false: the times interest earned ratio is EBIT minus interest

False

Which of the following are traditional financial ratio categories?

Financial leverage ratios, turnover ratios, profitability ratios

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 increase or decrease

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company

false

Which of the following is the correct representation of the cash coverage ratio?

(EBIT - depreciation) / Interest Expense

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)

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)

True or false: the DuPoint identity is a popular expression breaking ROA into three parts

False; ROE

True or false: financial ratios are computed using balance sheet information

False; information from all financial statements

True or false: If a company has inventory the quick ratio will always be greater than the current ratio

False; less than

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio

False; less than

Which of the following represents the receivables turnover ratio?

Sales/accounts receivable

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets

Which of the following create problems with financial statement analysis?

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

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

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

True or false: The cash ratio is found by dividing cash by current liabilities

True

True or false: the debt-equity ratio equals the total assets minus total equity all over total assets

True

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

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ____ available to pay interest

cash

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

cash, accounts payable

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

The cash ratio is found by dividing cash by

current liabilities

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

depreciation

Return on assets equals net income ____ by total assets

divided

The ___ payout ratio equals cash dividends divided by net income

dividend

Financial statement analysis is primarily "management by ___"

exception

True or false: inventory turnover is sales divided by inventory

false

True or false: the retention ratio equals one minus the ROA

false

True or false: there is a solid and prescriptive method to select which ratios to use in financial statement analysis

false

True or false: the price-earnings ratio is price per share times earnings per share

false; divided by

True or false: Market-to-book ratio equals book value per share divided by market value per share

false; market value/book value

Long-term solvency ratios are also known as

financial leverage ratios

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

financial policy, profit margin, dividend policy

___ are the prime source of information about a firm's financial health

financial statements

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

An increase in profit margin will ___ a firm's sustainable growth rate

increase

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

increase

Which one of the following does not affect ROE according to the DuPont identity?

investor sentiment (Affects operating efficiency, financial leverage, asset use efficiency)

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

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

it will increase

Long-term solvency ratios measure what aspect of the firm's financial position?

its financial leverage

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

less than

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

Short-term solvency ratios are also called ____ ratios

liquidity

Short-term solvency ratios are called _____ ratios

liquidity

Time-trend analysis is an example of

management by exception

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

market

How is the price-earnings (PE) ratio computed?

market price per share / earnings per share

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

The retention ratio equals one ___ the dividend payout ratio

minus

A firm may use a price-sales ratio when it has had ___ earnings over the past year

negative

Which one of the following is the correct equation for computing return on assets (ROA)?

net income/ total assets

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

net income/total equity

The DuPont identity shows that _____ times total asset turnover times equity multiplier equals ROE

net profit margin

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

non-cash expenses

___ group analysis is a way to establish a benchmark when using ratios

peer

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

performance evaluation

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

price-sales ratio

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

price-sales ratio

The price-earnings ratio is ____ per share divided by ___ per share

price; earnings

Return on assets (ROA) is a measure of

profitability

Return on equity (ROE) is a measure of

profitability

Which of the following are traditional financial ratio categories?

profitability ratios, turnover ratios, financial leverage ratios

Receivables turnover is ____ divided by accounts receivable

sales

The profit margin is equal to net income divided by

sales

Which one of the following equations defines the total asset turnover ratio?

sales/total assets

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

solvency

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

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

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

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

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

10 cents

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

26

Days' sales in receivables is given by the following ratio

365/Receivables turnover

Cal's market has return on equity (ROE) of 15 percent. What does this mean?

Cal's generated $.15 in profit for every $1 of book value of equity

Cal's Market has return on equity (ROE) of 15 percent. What does this mean?

Cal's generated %.15 in profit for every $1 of book value of equity

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

Cash, accounts payable

How is the inventory turnover ratio computed?

Cost of goods sold/inventory

The ___ identity can help to explain why two firms with the same return on equity may not be operating in the same way

DuPont

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

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

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

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

The DuPont Identity breaks ROE into ____ parts

three

True or false: it is important to investigate trends in financial ratios to identify the reason for the trend

true

True or false: profit margin equals net income divided by sales

true