CHAPTER 3 Finance

Days' Sales in Inventory

365/inventory turnover

Has positive net working capital

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

Debt to Equity Ratio = (1.5 − 1) / 1 = .50

A firm has an equity multiplier of 1.5. This means that the firm has a debt ratio of

Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55

A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio?

Current ratio = $37,500 / ($37,500 − 8,200) = 1.28

A firm has net working capital of $8,200 and current assets of $37,500. What is the current ratio

Debt-equity ratio = $348,092 / ($638,727 − 348,092) = 1.20

A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

Equity multiplier = 1 + 1.43 = 2.43

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?

Days' sales in inventory = 365 / ($764,500 / $123,600) = 59.01 days

Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?

Times interest earned ratio = ($645,560 − 425,890 − 32,450) / $12,500 = 14.98

Gorilla Movers has sales of $645,560, cost of goods sold of $425,890, depreciation of $32,450, and interest expense of $12,500. The tax rate is 30 percent. What is the times interest earned ratio?

sells its entire inventory an average of 15 times each year.

If a firm has an inventory turnover of 15, the firm:

Accounts receivable turnover = 365 / 16.8 = 21.73

It takes K's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

Days' sales in receivables = 365 / [(1.17 × $523,700) / $38,100] = 22.70

Jessica's Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.

Price-earnings ratio = $13 /{[.062 × ($613,000 × 1.08)]/21,000} = 6.65

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

Plowback ratio = 1 − [($16,672 / 15,000)/$2.03] = .4525, or 45.25 percent

Last year, Teresa's Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio?

Internal growth rate = [($.094/$1.21) × (1 − .45)]/{1 − [($.094/$1.21) × (1 − .45)]} = .0446, or 4.46 percent

Lookin' Up earns $.094 in profit on every $1 of sales and has $1.21 in assets for every $1 of sales. The firm pays out 45 percent of its profits to its shareholders. What is the internal growth rate?

Return on equity = (.036 × $1,150,000)/$645,500 = .0641, or 6.41percent

Martn Tucker Enterprises., has total equity of $645,500, sales of $1.15 million, and a profit margin of 3.6 percent. What is the return on equity?

Total Asset Turnover

Sales/Total Assets

Total debt ratio = ($23,456 + 148,000) / $485,390 = .35

Southern Style Realty has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio?

No new external equity and a constant debt-equity ratio

the sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

Total asset turnover = 1 / .78 = 1.28

whitt's BBQ has sales of $1,318,000, a profit margin of 7.4 percent, and a capital intensity ratio of .78. What is the total asset turnover rate?

Price Earnings Ratio

market price per share/earnings per share

Return on Assets

net income/average total assets

Profit Margin Ratio

net income/net sales

Return on assets = (.043 × $680,300)/$589,100 = .0497, or 4.97 percent

spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets?

Internal Growth Rate

the maximum growth rate a firm can achieve without external financing of any kind

Cash Coverage Ratio

(EBIT + Depreciation) / Interest

Cash coverage ratio

(EBIT + Depreciation) / Interest

days sales in receivables ratio

(accounts receivable x 365) / sales turnover

Return on Equity

(profit margin * sales) / total equity

Plowback Ratio

1 - payout ratio

Equity multiplier = $550,000 / ($550,000 − 295,000) = 2.16

Allyba Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier?

Accounts receivable turnover = ($538,500 / .90) / $35,680 = 16.77

Andras Technology has accounts receivable of $35,680, total assets of $538,500, cost of goods sold of $325,400, and a capital intensity ratio of .90. What is the accounts receivable turnover rate?

Times interest earned ratio = $56,850 / {$56,850 − [$23,954 / (1 − .30)]} = 2.51

Assume earnings before interest and taxes of $56,850 and net income of $23,954. The tax rate is 30 percent. What is the times interest earned ratio?

Earnings per share = (.0587 × $911,300)/18,500 = $2.89

BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?

Profit margin = {[(.058 × $137,000) − $4,700] × (1 − .34)} / $137,000 = .0156, or 1.56 percent

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

Payout Ratio

Cash Dividends/Net Income

Total Assets

Common-size financial statements present all balance sheet account values as a percentage of:

Capital intensity ratio = ($389,100 / .086) / ($389,100 / .028) = .33

Discount Outlet has net income of $389,100, a profit margin of 2.8 percent, and a return on assets of 8.6 percent. What is the capital intensity ratio?

times interest earned ratio

EBIT/Interest

Accounts receivable turnover

Net Sales / Average Accounts Receivable

Current ratio = ($689,400 − 512,100) / ($689,400 − 364,182 − 198,375) = 1.40

Philippe Organic Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364.182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

Internal Growth Rate

ROA x b / 1 - ROA x b

Sustainable Growth Rate (SGR)

ROE x (1 - payout ratio)

Sustainable growth rate = {[$5,100/($11,300 + 54,900 − 23,800)] × [($5,100 − 800)/$5,100]}/(1 − {[$5,100/($11,300 + 54,900 − 23,800)] × [($5,100 − 800)/$5,100]}) = .1129, or 11.29 percent

The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the sustainable growth rate

Equity multiplier × Return on assets.

The DuPont identity can be accurately defined as:

liquidity of a firm.

The cash ratio is used to evaluate the:

one plus the debt-equity ratio.

The equity multiplier is equal to:

Equity Multiplier

Total Assets/Total Equity

Total Debt Ratio

Total Debt/Total Assets

Debt to Equity Ratio

Total Debt/Total Equity

Inventory turnover = $512,900 / $74,315 = 6.90 times

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?

C

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? Multiple Choice a.) A decrease in the total asset turnover b.) A decrease in the capital intensity ratio c.)An increase in days' sales in receivables d.) A decrease in the profit margin e.) A decrease in the inventory turnover rat

A

Which one of these statements is true concerning the price-earnings (PE) ratio? Multiple Choice a.) A high PE ratio may indicate that a firm is expected to grow significantly. b.) A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. c.) PE ratios are unaffected by the accounting methods employed by a firm. d.) The PE ratio is classified as a profitability ratio. e.) The PE ratio is a constant value for each firm.

The cash coverage ratio

ability of firm to pay debt

Common-size income statement

an income statement in which each item is expressed as a percentage of sales

Inventory Turnover

cost of goods sold/average inventory