BCOR 340 Ch 3

Which of the following is the correct representation of the total debt ratio?

(Total Assets - Total Equity) / Total Assets

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

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

Which of the following create problems with financial statement analysis?

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

Which of the following are traditional financial ratio categories?

- Turnover Ratios - Profitability Ratios - Financial Leverage Ratios

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

-Comparing to aspirant companies -Comparing to peer companies -Comparing to its own historical ratios -Comparing to major competitors

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

-Financial policy -Dividend policy -Profit margin -Total asset turnover

AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shows the 20% return on equity is from a(n) ____ total asset turnover ratio.

0.59 TAT = SLS/TA

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

1.15 currents assets/(total debt-long-term liabilities)

Alpha Co. has interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?

1.58% 1.2/76

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

10 times $30 / $3 = 10 times

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

10.71% Profit Margin = Net income / Sales

BC Corporation has 1,800 shares outstanding and earned $2,700 last year in assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times 18(2,700/1,800) price per share/(net income/shares outstanding)

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. The firms Day sales in inventory is

146 inventory turnover = COGS/inventory 365/inventory turnover

The equity multiplier for a company with $2.5 million in total assets and $1.25 million in equity is ___

2.0 total assets/total equity

BK Trucking has total equity of $25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?

2.25 38/(25,380/1,500)

A firm had operating profit (EBIT) of 300,000 on sales of 500,000. Interest expense was 125,000 and taxes were 60,000. The company has a times interst earned ratio of

2.40 300,000/125,000 EBIT/interest

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?

20.18% NI/equity equity = assets - debts

Alpha Star's net income is 300 on 2,000 of sales. The company has 5,000 in assets and equity of 3,000. The firm paid out 125 in cash dividends. What is the dividend payout ratio?

41.67% Cash dividends/net income

Better Life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. The firm's receivable turnover is ___ times.

5 2,000,000 * .05 = $100,000 (accounts receivable) 5000.000 / 100,000 = 5

AD Corporation had net income of $300,000 and aid out $125,000 in cash dividends to stockholders. The firms retention ratio is ___%

58% retention ratio = addition to retained earnings/net income = (net income - dividends) /net income

Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?

7.76% (.12 * .60) / (1 - .12 * .60)

Alpha manufacturing has cost of good sold of $90 million and a net income of $9.6 million on total sales of $120 million. Total assets are $150 million. A common size income statement will show cost of goods sold of 75% and a net profit of __%

8

BC Corporation had net income of $3.5 million and paid out 700,000 in cash dividends to stockholders. Their retention ratio is ___%.

80 Retention ratio = (3,500,000 - 700,000) / 3,500,000

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

Cash and accounts payable

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

Grow by 3 percent or less without any additional external financing

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

It will increase

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

May increase or decrease May not change

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

Which of the following equations defines the total assets turnover ratio?

Sales/Total assets

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

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

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

The cash ratio is found by dividing cash by:

current liabilities

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

depreciation

Financial statement analysis is primarily "management by ___"

exception

Long-term solvency ratios are also known as

financial leverage ratios

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

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

less than

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

liquidity

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

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

non-cash expenses

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

performance evaluation

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

price-sales ratio

The profit margin is equal to net income divided by

sales

___ financial statements provide for comparison of firms that differ in size

standardized

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

True or false: a way to establish a benchmark for ratio analysis is to identify a peer group

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