FI 305 Morosan - Ch. 3
Coulter Supply has a total debt ratio of .46. What is the equity multiplier? - 2.17 - 1.47 - .89 - 1.17 - 1.85
1.85 Debt-equity ratio = .46/(1-.46) Debt-equity ratio = .85 Equity multiplier = 1 +.85 Equity multiplier = 1.85
A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit? - quick - cash - current - total debt - debt-equity
cash
Common-Size Balance Sheets
compute all accounts as a percent of total assets
The price-sales ratio is especially useful when analyzing firms that have: - negative earnings - a high Tobin's Q - positive PEG ratios - increasing sales - volatile market prices
negative earnings
Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio? - .47 - .31 - .51 - .56 - .42
.51 NWC to total assets = (1263+3907+7950-2214)(1263+3907+7950+8400) = .51
Ratios - allow for - used both
- better comparison through time or between companies - internally and externally
If a company produces a return on assets of 14 percent and also a return on equity of 14%, then the firm - has no net working capital - had a debt-equity ratio of 1.0 - has an equity multiplier of 1.0 - may have short-term, but not long-term debt - is using its assets as efficiently as possible
- has an equity multiplier of 1.0
Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio? A. 0.81 B. 0.73 C. 0.64 D. 0.83 E. 0.42
.73 Equity multiplier = .162/[.051(1.84)] EM = 1.73 Debt-Equity Ratio = 1.73-1 DE Ratio = .73
5 questions with ratios
1. How is it computed? 2. What is it intended to measure, and why might we be interested? 3. What is the unit of measurement? 4. What might a high or low value tell us? How might such values be misleading? 5. How could this measure be improved?
Why evaluate financial statements? 1. Internal Uses 2. External Uses
1. Internal Uses - performance evaluation - compensation and comparison between divisions - planning for the future - guide in estimating future cash flows 2. External Uses - creditors - suppliers - customers - stockholders
5 categories with ratios
1. Short-term solvency, or liquidity, ratios. 2. Long-term solvency, or financial leverage, ratios. 3. Asset management, or turnover, ratios. 4. Profitability ratios. 5. Market value ratios.
Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense of $1,600. What is the times interest earned ratio for the year? - 9.63 - 10.81 - 7.75 - 14.97 - 10.97
10.81 TIE = [12,400(1-.21) + 1,600]/1,600 TIE = 10.81
A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.2. What is the market-to-book ratio? A. 1.84 B. 2.12 C. 1.39 D. 2.69 E. 2.45
2.12 EPS = 126,400/160,000 EPS = .79 Price per share = .79(21.3) Price per share = 16.827 MTB Ratio = 16.827/7.92 MTB Ratio = 2.12
Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio? A. 21.9 B. 26.7 C. 24.3 D. 18.6 E. 17.4
26.7 PPS = 1.20(328,000/8,000) PPS = 49.20 EPS = [.045(328,000)]/8,000 EPS = 1.845 PE ratio = 49.20/1.845 PE ratio = 26.7
Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables? A. 21.90 days B. 27.56 days C. 33.18 days D. 35.04 days E. 36.19 days
33.18 Credit Sales = .66(161,000/.076) Credit Sales = 1,398,158 Days' sales in receivables = 365/(1,398,158/127,100) Days' sales in receivables = 33.18 days
Which of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time? - Common-base year statement - Common-size statement - Base reconciliation statement - Statement of cash flows - Statement of standardization
Common-base year statement
Peer Group Analysis
Compare to similar companies or within industries SIC and NAICS codes
Common Size Income Statements
Compute all line items as a percent of sales
During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the firm's cash flows for the year? - Net use of cash of $25 - Net source of cash of $120 - Net source of cash of $45 - Net source of cash of $205 - Net source of cash of $115
Net source of cash of $25 Sources (uses) of cash = 160-115-70 = -25
Time-Trend Analysis
Used to see how the firm's performance is changing through time Internal and external uses Choose a base year and then express each item relative to the base amount
DL Farms currently has $600 in debt for every for every $1000 in equity. Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action? - Return on equity - Profit margin - Equity multiplier - Total asset turnover - Return on assets
equity multiplier
Relationships determined from a company's financial information and used for comparison purposes are known as: - scenario analysis - financial ratios - identities - solvency analysis - dimensional analysis
financial ratios
What does the new tax law generally result in?
higher operating cash flow, all else equal, net income will be higher - this will result in a larger increase in equity as well
Investment Acitivity (CF)
includes changes in fixed assets
Financing Activity (CF)
includes changes in notes payable, long-term debt, and equity accounts, as well as dividends
Operting Activity (CF)
includes net income and changes in most current accounts
DuPont Identity
popular expression breaking ROE into three parts: operating efficiency (as measured by profit margin), asset use efficiency (as measured by total asset turnover), and financial leverage (as measured by the equity multiplier)
Tobin's Q relates the market value of a firm's assets to which one of the following? - the average asset value of similar firms - today's cost to duplicate those assets - the average market value of similar firms - current book value of the firm - the initial cost of creating the firm
today's cost to duplicate those assets
When do cash outflows occur?
when we "buy" assets, buy back debt instruments (pau off some debt), or buy back stock shares
Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio? - 1.15 - .94 - .87 - 1.06 - 1.21
1.15 CL = 687,600-223,700 CL = 463,900 Total Equity = 1,711,000-463,900-450,000 Total Equity = 797,100 Debt-equity ratio = (463,900+450,000)/797,100 Debt-equity ratio = 1.15
Pittsburgh Motors has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950, and interest expense is $65. What is the common-size statement value of the interest expense? - 2.03% - 1.69% - 1.35% - 1.51% - .89%
1.51% Common-size interest = 65/4,300 CSI = .0151 = 1.51%
short-term solvency ratios
as a group are intended to provide info about a firm's liquidity, and these ratios are sometimes called liquidity measures
For the past year, Jenn's Floral Arrangements had taxable income of $198,600, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of $11,300, and a tax rate of 21%. What is the amount of dividends paid during the year? - $157,280 - $163,200 - $153,555 - $159,935 - $158,704
$158,704 NI = 198,600(1-.21) NI = 156,894 Dividends paid = 156,894 - (316,940-318,750) Dividends paid = 158,704
An increase in which of the following MUST increase the return on equity, all else constant? - total asset turnover and debt-equity ratio - net income and total equity - debt-equality ratio and total debt - total assets and sales - equity multiplier and total equity
total asset turnover and debt-equity ratio
RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following? - utilizing its fixed assets more efficiently than Sam' s - maintaining the same level of current assets as Sam's - generating $1 in sales for every $1.26 in net fixed assets - generating $1.26 in net income for every $1 in net fixed assets - utilizing its total assets more efficiently than Sam's
utilizing its total assets more efficiently than Sam's
When do cash inflows occur?
when we "sell" assets, sell debt instruments (take on more debt), or sell stock shares
