Financial management chapter 3 recharge

What is the formula for computing a firm's sustainable growth rate?

(ROE × b)/(1 − ROE × b)

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its Blank______.

liquidity

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

net income/total assets

Return on equity (ROE) is a measure of

profitability

The profit margin is equal to net income divided by

sales

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

sales, revenue, or sale

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

solvancy

Which one of the following best explains why financial managers use a common-size balance sheet?

to track changes in a firm's capital structure

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

total assets

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

true

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

true

A firm with a profit margin of 10 percent 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

Cal's Market has a 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.

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

False The dividend payout ratio equals cash dividends divided by net income.

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

False The price-earnings ratio is price per share divided by earnings per share.

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

False because The current ratio will increase if current assets increase, while everything else remains unchanged.

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

False because The retention ratio equals one minus the dividend payout ratio.

True or false: The times interest earned ratio is EBIT minus interest.

False because The times interest earned ratio is EBIT divided by interest.

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

Increase

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.

Receivables turnover

Sales/Accounts receivable. If sales increase and there is no change in receivables, receivables turnover would increase.

Which of the following best explains why financial managers use a common-size income statement?

The common-size income statement can show which costs are rising or falling as a percentage of sales.

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.

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

DuPont Identity

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

The current ratio computes the relationship between

current assets and current liabilities

Given an internal growth rate of 3 percent, a firm will

grow by 3 percent or less without any additional external financing

Inventory turnover is cost of goods sold divided by

inventory

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

less than Since the quick ratio excludes inventory, it will always be less than the current ratio.