Chapter 3 Finance

Which of the following is the correct representation of the cash coverage ratio

(EBIT + depreciation)/Interest expense

What is the formula for computing the internal growth rate (IGR)

(ROA × b)/(1 − ROA × b)

What is the formula for computing a firm's sustainable growth rate

(ROE × b)/(1 − ROE × b)

Which of the following is the correct representation of the total debt ratio?

(Total assets − Total equity)/(Total assets)

A firm with a profit margin of 10 percent generates Blank______ in net income for every dollar in sales.

10 cents

A firm with a 26 percent return on equity earned Blank______ cents in profit for every one dollar in shareholders' equity.

26

Days' sales in receivables is given by the following ratio:

365/receivables turnover

Cal's Market has a return on equity (ROE) of 15 percent. What does this mean

Cal's generated $.15 in profit for every $1 of book value of equity.

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of available to pay interest.

Cash

How is the inventory turnover ratio computed

Cost of goods sold/Inventory

The Blank______ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

False

______ are the prime source of information about a firm's financial health.

Financial statements

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.

Which of the following is the correct equation for return on equity

Net income/Total equity

Which of the following represents the receivables turnover ratio

Sales/Accounts receivable

financial statements enable one to compare firms that differ in size.

Standardized

Which of the following best explains why financial managers use a common-size income statement? The common-size income statement can show which costs are rising or falling as a percentage of sales. The common-size income statement can show sources of cash for the company.

The common-size income statement can show which costs are rising or falling as a percentage of sales.

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets

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.

Which of the following create problems with financial statement analysis? Multiple select question. The firm or its competitors are conglomerates. The firm and its competitors are approximately the same size. The firm or its competitors are global companies. The firm and its competitors operate under different regulatory environment

The firm or its competitors are conglomerates. The firm or its competitors are global companies. The firm and its competitors operate under different regulatory environments.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables

The total asset turnover ratio will increase.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

Which of the following are true of financial ratios? Multiple select question. They use only balance sheet data. They are developed from a firm's financial information. They are computed in the same manner by all firms. They always reflect market values. They are used for comparison purposes.

They are developed from a firm's financial information. They are used for comparison purposes.

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

True

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

True

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes Blank______ to sell.

a long time

Which of the following items are used to compute the current ratio? Multiple select question. cash accounts payable equipment earnings

cash accounts payable

Which of the following would help a company take action to improve its ratios? Multiple select question. comparing to aspirant companies comparing to peer companies comparing to major competitors comparing to its own historical ratios comparing to DOW 30 companies

comparing to aspirant companies comparing to peer companies comparing to major competitors comparing to its own historical ratios

A firm with a market-to-book value that is greater than 1 is said to have Blank______ value for shareholders

created

The current ratio computes the relationship between

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has (increased/decreased) its liquidity over the past year.

decreased

The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.

depreciation

The payout ratio equals cash dividends divided by net income

dividend

Financial statement analysis is primarily "management by Blank______ ."

exception

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

false

True or false: Financial ratios are computed using only balance sheet information.

false

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

True or false: Market-to-book ratio equals book value per share divided by market value per share.

false

True or false: The times interest earned ratio is EBIT minus interest.

false

Which of the following are traditional financial ratio categories? Multiple select question. financial leverage ratios profitability ratios real options ratios turnover ratios competition ratios

financial leverage ratios profitability ratios turnover ratios

Long-term solvency ratios are also known as:

financial leverage ratios.

Given an internal growth rate of 3 percent, a firm will Blank______.

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

An increase in a firm's total asset turnover will Blank______ the sustainable growth rate

increase

An increase in the profit margin will Blank______ a firm's sustainable growth rate.

increase

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will

increase

What will happen to the current ratio if current assets increase, while everything else remains unchanged

increase

Inventory turnover is cost of goods sold divided by

inventory

Which one of the following does not affect ROE according to the DuPont identity

investor sentiment

Long-term solvency ratios measure what aspect of the firm's financial position?

its financial leverage

If a company has inventory, the quick ratio will always be Blank______ the current ratio.

less than

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its

liquidity

Short-term solvency ratios are also called ratios.

liquidity

Time-trend analysis is an example of:

management by exception

Whenever Blank______ information is available, it should be used instead of accounting data.

market

How is the price-earnings (PE) ratio computed?

market price per share/earnings per share

The price-earnings (PE) ratio is a Blank______ ratio.

market value

Based on the DuPont Identity, an increase in sales, all else held equal, Blank______ ROE.

may not change may increase or decrease

The retention ratio equals one the dividend payout ratio.

minus

A firm may use a price-sales ratio when it has had (negative/positive) earnings over the past year.

negative

Which one of the following is the correct equation for computing return on assets (ROA)

net income/total assets

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio

noncash expenses

One of the most important uses of financial statement information within the firm is

performance evaluation.

The price-earnings ratio is Blank per share divided by blank per share

price, earning

The DuPont identity shows that , times total asset turnover times equity multiplier equals ROE.

profit margin

Return on assets (ROA) is a measure of

profitability

Return on equity (ROE) is a measure of

profitability

In a common-size income statement, each item is expressed as a percentage of total

sales

Receivables turnover is divided by accounts receivable

sales

The profit margin is equal to net income divided by

sales

Which one of the following equations defines the total asset turnover ratio

sales/total assets

The times interest earned ratio is a measure of long-term

solvency

The DuPont identity breaks ROE into parts.

three

Which one of the following best explains why financial managers use a common-size balance sheet? Multiple choice question. to identify changes in operating costs to keep an eye on the firm's profit margin to track changes in a firm's capital structure to monitor labor costs

to track changes in a firm's capital structure

A common-size balance sheet expresses accounts as a percentage o

total assets

True or false: Profit margin equals net income divided by sales.

true

True or false: The DuPont identity is a popular expression breaking ROE into three parts

true

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

true

rue or false: The cash ratio is found by dividing cash by current liabilities.

true