FIN 125: Exam 1 Study Questions (Chapter 3)

What are the three parts to a DuPont Analysis?

1. Operating Efficiency: Profit Margin 2. Asset Usage Efficiency: Total Asset Turnover 3. Financial Leverage: Equity Multiplier

Which one of the following ratios is a measure of a firm's liquidity? A. Quick ratio B. Debt-equity ratio C. NWC turnover D. Profit margin E. Cash coverage ratio

A. Quick Ratio (CA - Inventory)/CL

What are the Liquidity Ratios?

Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Current Assets - Inventory) / Current Liabilities Cash Ratio = Cash / Current Liabilities

How do you create the Common-Size Income Statement?

Divide everything by Sales and multiply by 100 for the % of sales

How do you create the Common-Size Balance Sheet?

Divide everything by total assets and multiply by 100 for the % of total assets

Which one of the following is a source of cash? A. Purchase of inventory B. Payment to a supplier C. Repurchase of common stock D. Granting credit to a customer E. Acquisition of debt

E. Acquisition of debt

Which one of the following accurately describes the three parts of the DuPont identity? A. Debt-equity ratio, capital intensity ratio, and profit margin B. Financial leverage, operating efficiency, and profitability ratio C. Operating efficiency, equity multiplier, and profitability ratio D. Return on assets, profit margin, and equity multiplier E. Equity multiplier, profit margin, and total asset turnover

E. Equity multiplier, profit margin, and total asset turnover

What two fundamental things do all firms do?

Generate Cash: selling a product/service, selling an asset, selling a security Use cash: purchasing materials/labor to produce a product/serve, buying an asset, paying creditors and owners

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales? IV. Does the company have the ability to meet its ST debt obligations in a timely manner?

I, II, and III

What do you have to do to find Net Cash from Operations?

Net Income + Depreciation Increase in Accounts Payable Increase in Current Liabilities - Increase in Current Assets Increase in Accounts Receivable Increase in inventory

Why are standardized financial statements used?

They make it easier to compare financial information, particularly as the company grows

What are the turnover ratios?

Total Asset Turnover (TAT) = Sales / Total Assets

What are the Financial Leverage Ratios?

Total Debt Ratio = (Total Assets - Total Equity) / Total Assets Equity Multiplier = (Total Assets / Total Equity) or (1 + (TA-TE)/TE)

Target has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's Club 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, Target must be doing which one of the following? A. Utilizing its total assets more efficiently than Sam's Club B. Generating $1 in sales for every $1.26 in net fixed assets C. Maintaining the same level of current assets as Sam's Club D. Utilizing its fixed assets more efficiently than Sam's Club E. Generating $1.26 in net income for every $1 in net fixed assets

A. Utilizing its total assets more efficiently than Sam's Club

What three categories are cash flows broken down into?

Operating Activity: Net income and current assets Investment Activity: Change in fixed assets Financing Activity: Change in notes payable, Long-term debt, equity + dividends

What are the Market Value Ratios?

Price-to-Earnings (PE) Ratio = Price per share / Earnings Per Share (or PPS / (Net Income / # shares outstanding)) PEG Ratio = PE Ratio / growth rate % Price-Sales Ratio = PPS / Sales Per Share Market-to-Book Ratio = Market Value per Share / Book Value per share Enterprise Value = Market Value of Stock + Book Value of liabilities - cash

What are the Profitability Ratios?

Profit Margin = Net Income / Sales Return on Assets (ROA) = Net Income / Total Assets Return on Equity (ROE) = Net Income / Total Equity

How do you calculate the DuPont Analysis?

ROE = (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Total Equity)