Finance 450 Chapter 3
Which of the following represents the receivable turnover ratio?
sales/accounts receivable
Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?
sales/accounts recievable $250,000/$86,200= 2.90
decrease
source of cash
At a fundamental level, firms generate cash and
spend it
uses of cash
spending/cash out
Which two groups are most interested in liquidity ratios?
suppliers/ bankers
What does it mean when a firm has a days sales in recievables of 45?
the firm collects credit sales in 45 days on average
A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?
times interest earned ratio= EBIT/interest 600/250=2.4
Which of the following is the correct representation of the total debt ratio?
total assets-total equity/total assets
true or false: The internal measure indicates how long a start-up company can operate until it needs more financing
true
increase
use of cash
How is the inventory turnover ratio computed?
Cost of Goods Sold / Inventory
Current Ratio Equation
Current Assets / Current Liabilities
The ___ identity explains why 2 firms with the same return may not be operating in the same way
Dupont
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better measure of how much cash is available to meet interest obligations
EBIT + depreciation/interest= cash coverage ratio
ROE equation
Net Income/Equity
Profit margin
Net Income/Sales
The EDITA ratio is similar to
PE ratio
Alder Inc. has net income of $403,000 operating earnings of $640,000 sales of $1.23 million, total assets of 1.48 million what's the return on assets?
ROA= net income/total assets $403,000/$1,480,000=27.23%
Total asset turnover ratio
Sales/Total Assets
change in account balances relate whether line item is ___ for a given year
a source or cash or a use
successful market ratio
above 1, unsuccessful below 1
profitability measures ROA and ROE are ___ rates of return
accounting
Although______ are often poor reflections of reality they are often the best info available
accounting numbers
Which of the following are among the items used to compute the current ratio?
accounts payable, cash
Which of the following are traditional financial ratio categories?
asset management ratios, market value ratios, profitability ratio
examples of assets vs liabilities
assets- cash, inventory, accounts receivable liabilities- accounts payable
sources of cash
bring cash in
cash ratio
cash/current liabilities
A firm with a market to book ratio that is greater than 1 is said to have ______ value for shareholders
created
The current ratio
current assets - current liabilities
BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?
current assets-inventory/current liabilities 9.2-4.3/8.1= .60 million
The cash ratio is found by dividing cash by:
current liabilities
What is the debt-equity ratio for a company with 3.5 million in total assets and 1.4 million in equity?
debt-equity ratio= total debt/total equity 3.5-1.4= 2.1 2.1/1.4=1.5 times
Which of the following are uses of cash?
decrease in accounts payable, increase in inventory, increase in property plant and equipment
inventory turnover ratio of 5 years means
entire inventory sold and replaced 5 times during the year
What does a current ratio of 1.2 mean
firm has $1.20 in current assets for $1 in current liabilities
____ PE ratio, company has better prospects for future growth in earnings
higher
The info needed to compute the profit margin can be found:
income statement
A ___ in net profit margin will increase ROE
increase
Which of the following are sources of cash?
increase in notes payable, decrease in accounts receivable
accts payable
increase: borrowed cash decrease: paid cash on bills
common stock
increase: issued stock, received cash decrease: bought stock back
liabilities and equity
increase: source of cash decrease: use of cash
inventory
increase: spent cash to produce decrease: sold for cash
Total capitalization equals total equity plus total
long term debt
Enterprise value
market value of stock + book value of liabilities - cash
market-to-book ratio
market value per share/book value per share
What ratios use info not in financial statements
market value ratios
PE ratio
price per share/earnings per share
Price earnings ratio
price per share/earnings per share
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. Use the DuPont identity to match each value
profit margin- 20% (1.6m/.8m)= 10% ROA- 20% (2.7m/.8m)= 5.93% equity multiplier- 2.7m/.8m 3.38
ROA measures
profitability
Return on equity (ROE) is a measure of
profitability
Financial statements are used to
-assess a company current financial position -communicate financial info within the firm -communicate financial info to outsiders
Ratio Analysis
-interpreting/analyzing financial statement data
firm total-debt ratio .3 times means the firm has ___ in total debt for every $1 in assets
.3
Which of these computes a days sales in receivables
365/receivables turnover
