Chapter 3 wk 3

What does ROA equal?

ROE/Equity multiplier Profit margin × Total asset turnover

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year-end was $180,000. What is the inventory turnover?

2.5 Reason: Correct. $450,000/$180,000 = 2.5.

If a firm needs $300 million in new assets and has projected retained earnings of $72.4 million, what is the external financing needed?

227.6 Reason: Correct. 300 − 72.4 = 227.6.

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?

405,000 Reason: Correct. EFN = $800,000 − $395,000 = $405,000.

BC Corporation has net income of $176,000, sales of $1,982,000, and total assets of $2.24 million. What is the return on assets?

7.86 percent Reason: Correct. $176,000/$2.24 million = 7.86 percent.

Equity Multiplier

Assets/Total Equity

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

1.50 Reason: Correct. Total debt = assets − equity ($3.5 million − 1.4 million) = $2.1 million debt/equity = $2.1 million /$1.4 million = 1.50. (Equation 3.5)

Vera has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

10 times Reason: Correct. $30/$3 = 10 times.

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times Reason: Correct. $18/($2,700/1,800) = 12 times.

Financial analysis uses EBITDA over EBIT because the former adds back ______ and _____ and is thus a better measure of pretax operating cash flow.

Depreciation expense Amortization expense

A one-time profit from an asset sale makes it ______ to compare financial statements.

Difficult

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

DuPont

The information needed to compute the profit margin can be found on the ____.

Income statement

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

Increase

In a financial plan using the percentage of sales approach, as total assets increase, total liabilities and equity will ______.

Increase

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

Increase Reason: Correct. Receivables turnover = Sales/Accounts receivable. If sales increase and there is no change in receivables, receivables turnover would increase.

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past 3 years is 30 percent, 34 percent, and 40 percent, respectively. This indicates that the firm has increased its ______.

Leverage

Current assets on the common-size balance sheet over the past 3 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

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

Net income/Total assets

EBITDA is a measure of _____ operating cash flow.

Pretax

Match the component ratios of ROE with their correct calculations.

Profit Margin Net Income/Sales Total Asset Turnover Sales/Assets Equity Multiplier Assets/Total Equity

Which of the following are traditional financial ratio categories?

Profitability ratios Market value ratios Asset management ratios

The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ____ and those that do not.

Sales

The profit margin is equal to net income divided by ______.

Sales

Total Asset Turnover

Sales/Assets

Which of the following represents the receivables turnover ratio?

Sales/accounts receivables

Which of the following are traditional financial ratio categories?

turnover ratios liquidity ratios financial leverage ratios

Income statement items that are affected by_________ will be included in the percentage of sales approach.

Sales

The sustainable growth rate is computed as ROE × b when equity used is at the ______ of the period

Beginning

Which of the following are often left out of most financial planning models?

Cash flow size, risk, and timing

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

The current ratio computes the relationship between ____.

Current assets and current liabilities

Which of the following are noncash expenses on the income statement?

Depreciation expense Amortization expense

Financial planning is a(n) _____ process

Iterative

How is the EBITDA margin computed?

EBITDA/Sales

All else equal, when the rate of growth in sales or assets in a financial plan is higher,_______ financing needs will be greater.

External

Common-size statements are used for comparing firms with differing ____.

Sizes

________ financial statements provide for comparison of firms that differ in size.

Standardized

Profit Margin

net Income/sales

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity= $100. What is the total debt ratio?

0.42 Reason: Correct. Debt ratio is debt/total assets. To compute debt, you need to subtract equity from assets. So debt = ($48 + 125 − 100) = $73, and assets = ($48 + 125) = $173, and debt ratio =$73/$173 = 0.42.

A firm with $900,000 in sales, cash on hand of $1,150,000, liabilities of $400,000 and total assets of $2 million has a total asset turnover of ______ times.

0.45 Sales/total assets= total assets turnover 900,000/2,000,000

A firm with $600,000 in sales, cash on hand of $750,000, liabilities of $200,000, and total assets of $1 million has a total asset turnover of ______ times.

0.60 Reason: Correct. Total asset turnover = $600,000/$1 million = 0.60.

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?

1,2 million Reason: Correct. $2.7 million − 1.5 million = $1.2 million.

Which of the following items are used to compute the current ratio?

Accounts payable Cash

In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?

Additional working capital and fixed assets are needed to support growth. Reason: Correct. Additional working capital and fixed assets are needed to support growth.

Financial statements report ______.

Book values

The difference between ROA and ROE reflects the use of_______ financing.

Debt

True or false: A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both within and outside the firm.

True