FIN Chpt 4
_____ removes the effects of taxes and financial leverage, and is useful for comparison.
BEP
_____ does not consider risk or amount of capital invested.
ROE
T/F: Suppose Firms A and B have have everything the same. However, Firm A has a higher debt to capital ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.
T
How efficiently the firm is using its assets.
asset management
a measure of the firm's asset use efficiency - how well does it manage its assets
asset turnover
T/F: High current and quick ratios always indicate that the firm is managing its liquidity position well.
f
T/F: One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.
f
T/F: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
f
T/F: Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
f
P/E and M/B are high if expected growth is ___ and risk is ___.
high, low
In general, investors regard companies with _____ M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.
higher
Firms ability to pay off debts that are maturing in one year.
liquidity
When a company has higher interest charges, it will have _______ taxable income and taxes
lower
What investors think about the firm's future prospects.
market value
How much investors are willing to pay for $1 of book value equity
mb
tells us how much investors are willing to pay for a dollar of accounting book value.
mb
financial markets in which funds are borrowed or loaned for short periods (le liquid debt securities
money market
How much investors are willing to pay for $1 of earnings.
pe
a measure of the firm's operating efficiency - how well it controls costs
profit margin
Return on Equity, Return on Capital, Profit Margin
profitability
T/F: If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
t
T/F: If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
t
T/F: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
t
T/F: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
t
