FIN: Chapter 3
Cash Coverage Ratio
(EBIT + Depreciation) / Interest
What is the formula for computing the internal growth rate (IGR)?
(ROA x b)/(1 - ROA x b)
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/(1 - ROE x b)
Total Debt Ratio
(Total Assets - Total Equity) / Total Assets
debt-equity ratio
(total assets - total equity) / total assets
Days' sales in receivables is given by the following ratio:
365/Receivables turnover
T or F? If there is a conflict between market and accounting data, accounting data should be given precedence.
False
T or F? The dividend payout ratio equals cash dividends divided by sales.
False
T or F? There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
False
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.
return on assets (ROA)
Net Income / Total Assets
return on equity
Net Income / Total Equity
Financial ratios are
developed from a firm's financial information used for comparison purposes
Given an internal growth rate of 3 percent, a firm can _____.
grow by 3 percent or less without any additional external financing
The information needed to compute the profit margin can be found on the ____.
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
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
Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.
may not change may increase or decrease
Profit Margin Formula
net income / sales
The DuPoint identity shows that ________________ times total asset turnover times equity multiplier equals return on equity (ROE)
net proft margin
price-earnings (PE) ratio
price per share / earnings per share
Return on assets (ROA) is a measure of _____.
profitability
In a common-size income statement, each item is expressed as a percentage of total
sales
Recieveables turnover ratio
sales / accounts receivable
The times interest earned ratio is a measure of long-term
solvency
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales
10 cents
Cash ratio formula
Cash / Current Liabilities
Times Earned Interest
EBIT / interest expense
What creates problems with financial statement analysis?
The firm and its competitors operate under different regulatory environments. The firm or its competitors are global companies. The firm or its competitors are conglomerates
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.
Why do financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
T or F? It is important to investigate trends in financial ratios to identify the reason for the trend.
True
Inventory Turnover
cost of goods sold / inventory
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
created
The current ratio computes the relationship between ____.
current assets and current liabilities
