FNCE 241 CH3
Cash Ratio
Cash/ Current Liabilties A very short term creditor may be only interested in the cash ratio.
Receivables turnover
Sales/Accounts receivable
NWC turnover
Sales/NWC
Equity multiplier
Total assets/ total equity
A firm's total assets minus total liabilities equals its shareholder equity.
True
Net working capital is defined as current assets minus current liabilities.
True
The financial statement summarizing the value of a firm's financial position at a particular date in time is known as the balance sheet.
True
For a firm with 50% debt and 50% equity, it its return on assets is 14%, its return on equity will be greater than 14% .
True ROA = NI/ Total Assets ROE = NI/Total Equity Assets are bigger than Equity which makes the ratio go down.
If a firm uses part of the cash it received from payment of an account receivable to buy inventory and leaves the rest in its bank account, its current ratio will remain unchanged.
True Because inventory is a current asset
Glen Acre Wines has sales of $682,100, total debt of $285,000, total equity of $323,900, and a profit margin of 8 percent. What is the return on assets? A. 6.28 percent B. 8.96 percent C. 9.03 percent D. 9.11 percent E. 9.17 percent
B. 8.96 percent NI/S = .81 so NI = 54,568 and A=D+E =323,900+285,000, so ROA = 54,568/608,900 = 0.0896 or 8.96%
At the end of each year for the next 10 years you will receive cash flows of $51. The initial investment is $321. What rate of return are you expecting from this investment? A. 9.06% B. 9.44% C. 10.27% D. 12.01% E. 12.28%
B. 9.44% here PMT=51, N=10, PV=-321, FV=0 and CPT i/y =9.4440
A statement that expresses each account as a percentage of sales is called a: A. Common-size statement of financial position. B. Common-size statement of comprehensive income. C. Common-size statement of cash flows. D. Ratio statement of comprehensive income. E. Statement of ratio analysis.
B. Common-size statement of comprehensive income.
Which of the following could be calculated with the use of only a statement of financial position? A. Interval measure B. Equity multiplier C. Receivables turnover D. Times interest earned E. Return on equity
B. Equity multiplier
The total long-term debt plus the equity of the firm is frequently called: A. Total assets. B. Total capitalization. C. Total financing. D. Debt-equity consolidation. E. Debt-equity reconciliation.
B. Total capitalization.
The financial statement summarizing the value of a firm's financial position at a particular date in time is the statement of comprehensive income.
False
Long-term debt ratio
Long-term debt/Long-term debt + Total equity
Return on equity****
NEt IncOme/ tOtal eQuiTy
Return on assets ****
Net income/TOtal AsseTs
Net working capital to total assets
Net working capital/ Total assets
Debt/Equity Ratio
Total Debt/Total equity
Total Debt Ratio
(Total assets - Total Equity)/Total Assets
Day's Sales in Inventory
365/Inventory turnover
Days sales in receivables
365/Receivables turnover
30. Here are some ratios for 3 (possibly) well-known companies in the same industry for the year 2014. The companies are (A) Abercrombie and Fitch, (B) The Gap, and (C) Buckle, Inc. A B C Current ratio 2.2 1.7 3.5 Quick ratio 0.8 0.4 1.9 Inventory turnover 2.2 3.5 3.9 Long-term Debt/equity .25 .48 0.0 ROA 4.4% 16.6% 31.8% ROE 4.8% 43.0% 49.9% A. Which company do you think had the greatest rise in stock price in 2014? Explain why. B. Do any of these companies appear to have problems meeting short term liabilities? Explain why or why not. C. For an investor worried about long-term solvency and risk, which company appears to be the safest investment? Explain why. D. What does the inventory turnover ratio say about a company and which one is doing the best?
A) No guarantee here because stock prices also reflect future expectations, but company C likely did the best, but B could be close. Company A has a below average return for most companies and probably did not do well. Here you had to defend your answer if you picked something other than C. B) Based on current ratios all companies are Ok. The quick ratio for A is .8 which is below 1.0. This may or may not be much of a problem. Company however has a quick ratio of only 0.4. This is a potential problem if there is any lull in sales C) You could say that all companies have reasonably low debt-equity ratios. The safest for just long-term solvency however has to be the one with zero debt—company C and the riskiest has to be company B. You could come up with other reasons why C is unsafe, or why B or A are safer. You get full credit if your rationale makes sense, but it has to be listed since it is not the obvious answer. D) It shows how many times a company sells its inventory each year. In absence of other knowledge higher is better. C appears to be doing the best because 3.9 is the biggest number. Again, if you choose A or B you have to justify it in some way other than just stating A or B is better in terms of inventory turnover.
Fernando wants to have a monthly investment income of $5,000 per month for a retirement expected to last 20 years. A. How much does he need to have accumulated at the beginning of his retirement assuming payments occur at the end of each month, so that he can fund this retirement lifestyle if the expected return on his investments is 9% annually? B. How much would he have to set aside today as a lump sum to fund his retirement, if retirement is 30 years away? C. How much would he have to save monthly over a 30 year period to reach the amount needed in part A?
A) Set PMT=5000, N=20X12=240, FV=0, i/y = 9/12=.75 and CPT PV = 555,724.77 B) Simply take the present value of the sum needed in 30 years, so the PV of 555,724.77 using a 9% annual rate or .0075 = .75% monthly With monthly discounting the discount factor is (1.0075) ^30X12 =14.7306 and 555,724.77/14.7306 = $37,725.94 With annual discounting, the discount factor is (1.09)^30 = 13.2677 and 555,724.77/13.2677 = $41,855.61 C) Now FV=555,724.77. This is the future value of your savings annuity. Since it is an annuity PV=0, i/y = 9/12 = .75, and N= 30X12=360. Then CPT PMT = 303.55
. The future value interest factor is calculated as: A. (1 + r)t B. (1 + rt) C. (1 + r)(t) D. 1 + r - t E. (1 + r)(2)
A. (1 + r)t
A statement that expresses each entry in a financial statement as a percentage of assets is called a: A. Common-size statement of financial position. B. Common-size statement of comprehensive income. C. Common-size statement of cash flows. D. Ratio statement of comprehensive income. E. Statement of ratio analysis.
A. Common-size statement of financial position.
The corporate officer generally responsible for tasks related to cash and credit management, financial planning, and capital expenditures is the: A. Corporate Treasurer. B. Director. C. Corporate Controller. D. Chairman of the Board. E. Vice President of Operations.
A. Corporate Treasurer.
A use of cash can be defined as any activity that: A. Diminishes the cash balance of a firm. B. Generates cash for the firm. C. Affects the cash on hand. D. Involves a checking account. E. Affects current assets.
A. Diminishes the cash balance of a firm.
The ___________ breaks down return on equity into three component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage. A. Du Pont identity B. Return on assets C. Statement of cash flows D. Asset turnover ratio E. Equity multiplier
A. Du Pont identity
The primary goal of financial management is defined as the: A. Maximization of the current value per share of the outstanding stock. B. Maximization of the current profits per share of the firm. C. Minimization of the risks associated with company ownership. D. Maintenance of a steady stream of dividends to the existing shareholders. E. Minimization of the outstanding debt owed by the firm to third parties.
A. Maximization of the current value per share of the outstanding stock.
The financial ratio measured as net income divided by sales is known as the firm's: A. Profit margin. B. Return on assets. C. Return on equity. D. Asset turnover. E. Earnings before interest and taxes (EBIT).
A. Profit margin.
The equity multiplier ratio is measured as: A. Total assets divided by total equity. B. Total equity plus total debt. C. Total assets minus total equity, divided by total assets. D. Total assets plus total equity, divided by total debt. E. Total equity divided by total assets.
A. Total assets divided by total equity.
BC Hydro increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the: A. return on equity will increase. B. return on assets will decrease. C. profit margin will decline. D. equity multiplier will decrease. E. price-earnings ratio will increase.
A. return on equity will increase
Net working capital is defined as current assets plus current liabilities.
False
A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which of the following would be her optimal strategy? A. Undertake the plan that would reduce the overall riskiness of the firm. B. Undertake the plan that would maximize the current stock price. C. Undertake the plan that would result in the largest profits for the year. D. Undertake the plan that would maximize her personal wealth. E. Undertake the plan that would lead to the most stable stock price for the year.
B. Undertake the plan that would maximize the current stock price.
. If you received a $100 savings certificate at the time of your birth and it paid 5% annual interest at the end of each year, how much would you have on your 39th birthday (rounded to the nearest dollar) if you never withdrew any money and kept this certificate? A. $589 B. $634 C. $670 D. $700 E. $704
C. $670
The corporate officer generally responsible for tasks related to tax management, cost accounting, financial accounting, and data processing is the: A. Corporate Treasurer. B. Director. C. Corporate Controller. D. Chairman of the Board. E. Vice President of Operations.
C. Corporate Controller.
As the discount rate increases, the present value of $500 to be received six years from now: A. Remains constant. B. Also increases. C. Decreases. D. Becomes negative. E. Will vary but the direction of the change is unknown.
C. Decreases.
The death of the firm's owner(s) does NOT effectively dissolve which type(s) of organization? I. Sole proprietorship. II. Partnership. III. Corporation. A. I only B. II only C. III only D. I and III only
C. III only
Assets are listed on the statement of financial position in: A. Order of importance to the firm. B. Order of increasing size. C. Order of decreasing liquidity. D. No particular order. E. Order of preference in bankruptcy.
C. Order of decreasing liquidity.
The debt-equity ratio is measured as: A. Total equity minus total debt. B. Total equity divided by total debt. C. Total debt divided by total equity. D. Total debt plus total equity. E. Total debt minus total assets, divided by total equity.
C. Total debt divided by total equity.
A series of 48 monthly payments received at the beginning of each month rather than the end of the month is known as a (an) A.annuity. B. compound annuity. C. annuity due. D. future value. E. present value.
C. annuity due.
Inventory turnover
COGS/Inventory
Quick Ratio
Current Assets - Inventory/Current Liabities Inventory is the least liquid current asset and prices of products are not reliable due to market changes.
Current Ratio
Current Assets/Current Liabilties
Net working capital
Current assets - current liabilties is used to determine the availability of a company's liquid assets by subtracting its current liabilities.
Isabelle wants to invest $1,000. She wants to withdraw her money three years from now. Which bank should she use if she wishes to maximize her investment? A. Bank A, which offers a simple rate of 4%. B. Bank B, which offers a simple rate of 5%. C. Bank C, which offers a rate of 4% compounded annually. D. Bank D, which offers a rate of 5% compounded monthly. E. Bank E, which offers a rate of 3% compounded daily.
D. Bank D, which offers a rate of 5% compounded monthly.
The quick ratio is measured as: A. Current assets divided by current liabilities. B. Cash on hand plus current liabilities, divided by current assets. C. Current liabilities divided by current assets, plus inventory. D. Current assets minus inventory, divided by current liabilities. E. Current assets minus inventory minus current liabilities.
D. Current assets minus inventory, divided by current liabilities.
The formula which breaks down the return on equity into three component parts is referred to as which one of the following? A. equity equation B. profitability determinant C. SIC formula D. Du Pont identity E. equity performance formula
D. Du Pont identity
1. The agency problem is best defined as a conflict of interest between a firm's: A. Various employees. B. Various managers. C. Managers and the firm's employees. D. Stockholders and the firm's managers. E. Stockholders and the firm's debtors.
D. Stockholders and the firm's managers.
The agency problem is best defined as a conflict of interest between a firm's: A. Various employees. B. Various managers. C. Managers and the firm's employees. D. Stockholders and the firm's managers. E. none of the above
D. Stockholders and the firm's managers. agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth.
Agency costs are: A. The total dividends paid to shareholders over the lifetime of the firm. B. The costs that result from default and bankruptcy of the firm. C. Corporate income subject to double taxation. D. The costs of the conflict of interest between stockholders and management. E. The total interest paid to creditors over the lifetime of the firm.
D. The costs of the conflict of interest between stockholders and management.
Swenson Motors has total debt of $682,400 and a debt-equity ratio of .65. What is the value of the total assets? A. $1,049,846 B. $1,364,800 C. $1,414,141 D. $1,578,002 E. $1,732,246
E. $1,732,246 here equity = 682,400/.65 = 1,049,846 and assets = D+E = 682,400+1,049,846
A sole proprietorship is: A. A separate legal body formed by an individual who has limited personal liability. B. A business formed by two or more individuals. C. A corporation with only one shareholder. D. A company that has one general partner and any number of limited partners E. A business owned by one individual who has unlimited personal liability.
E. A business owned by one individual who has unlimited personal liability.
A stakeholder refers to A. Any person or entity that owns shares of stock of a corporation. B. Any person or entity that has voting rights based on stock ownership of a corporation. C. Only the person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock. D. Only creditors to whom the firm owes money and who consequently have a claim on the cash flows of the firm. E. Any person or entity who potentially has a claim on the cash flows of the firm.
E. Any person or entity who potentially has a claim on the cash flows of the firm.
Interest earned on both the initial principal and the interest reinvested from prior periods is called _____ interest. A. Free. B. Annual. C. Simple. D. Internal. E. Compound.
E. Compound.
A business entity wherein one or more owners may actively manage the firm (or hire an outside manager), while other owners choose limited liability instead of management responsibility is called a: A. Corporation. B. General partnership. C. Limited liability corporation. D. Limited liability company. E. Limited partnership.
E. Limited partnership.
A statement that explains the changes in the cash balance of a firm over time is called a(n): A. Statement of financial position. B. Statement of comprehensive income. C. Statement of current assets. D. Statement of analysis. E. Statement of cash flows.
E. Statement of cash flows.
All else the same, which of the following occurs when a firm buys inventory with cash? A. The quick ratio goes up if it was greater than one before the change. B. The current ratio goes down if it was greater than one before the change. C. The current ratio goes down if it was lower than one before the change. D. The quick ratio goes up if it was lower than one before the change. E. The quick ratio declines but the current ratio remains unchanged.
E. The quick ratio declines but the current ratio remains unchanged.
The equity multiplier ratio is measured as: A. Total equity divided by total assets. B. Total equity plus total debt. C. Total assets minus total equity, divided by total assets. D. Total assets plus total equity, divided by total debt. E. Total assets divided by total equity.
E. Total assets divided by total equity.
A common-size statement of comprehensive income is defined as a financial statement wherein all items are expressed as a percentage of: A. their prior year's value. B. their projected value. C. their 5-year average value. D. total assets. E. sales.
E. sales.
When you compare this year's quick ratio for a firm to the firm's quick ratio from prior periods, you are conducting _____ analysis. A. peer group B. industrial classification C. profitability D. external-trend E. time-trend
E. time-trend
A firm's total assets plus total liabilities equals its shareholder equity.
False
For a firm with 50% debt and 50% equity, if its return on assets is 14%, its return on equity will be less than 14% .
False