fin 350 homework CH 4

Companies that function without the use of borrowed money are said to have no leverage and are called __________________ companies

unleveraged

Can a company's shares exhibit a negative P/E ratio?

yes

Company A uses long-term debt to finance its assets, and company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm? 1. Company B 2. Company A

2. Company A

Which of the following statements about your analysis report is true? 1. The analysis likely includes incorrect and misleading conclusions. 2. The ratios provide an accurate and thorough representation of the Chinese company's performance.

The analysis likely includes incorrect and misleading conclusions.

A ______ days of sales outstanding represents an efficient credit and collection policy (high or low)

low

Examples of profitability ratios include :

several different types of profit margins, return on assets, and return on equity.

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply. 1. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. 2. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. 3. An increase in a company's earnings means that the profit margin is increasing. 4. If a company issues new common shares but its net income does not increase, return on common equity will increase.

1. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. 2. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

The inventory turnover ratio across companies in the software industry is 5.027x. Based on this information, which of the following statements is true for Polk Software Inc.? 1. Polk Software Inc. is holding more inventory per dollar of sales compared with the industry average. 2. Polk Software Inc. is holding less inventory per dollar of sales compared with the industry average.

1. Polk Software Inc. is holding more inventory per dollar of sales compared with the industry average.

An increase in an equity multiplier can be due to two factors:

1. an increase in the firm's total assets 2. an increase in its use of debt financing.

inventory turnover lower than the industry average means:

1. holding more average inventory per dollar of sales than the industry average 2. turning (selling and replacing) its inventory more slowly (or fewer times per year) than the average firm in the industry—everything else remaining constant—or both.

If a company's current assets are increasing:

1. it could indicate that the firm has too much old inventory that will have to be written off 2. too many old accounts receivable that may turn into bad debts.

the DuPont equation breaks down our ROE into three component ratios: the _______ __________ ____________ , the total asset turnover ratio, and the__________ ____________ .

1. net profit margin 2. equity multiplier

according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's _____________________________ , effectiveness in using the company's assets, and ______________________.

1. use of debt versus equity financing 2. control over its expenses

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. 1 Ratio analysis is conducted using benchmarking techniques. 2 Inflation can distort balance sheet data. 3 A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad."

2 Inflation can distort balance sheet data. 3 A firm's ratios can lead to conflicting conclusions—some ratios might be "good" and some "bad."

Which of the following statements is true about market value ratios? 1. Companies with high research and development (R&D) expenses tend to have low P/E ratios. 2. Companies with high research and development (R&D) expenses tend to have high P/E ratios.

2. Companies with high research and development (R&D) expenses tend to have high P/E ratios.

Based on your understanding of the uses and limitations of ROE, which of the following projects should be chosen if they have the same risk and cost of capital? 1. Project Y, with 40% ROE and a small investment, generating low expected cash flows 2. Project X, with 35% ROE and a large investment, generating high expected cash flows

2. Project X, with 35% ROE and a large investment, generating high expected cash flows

If current liabilities are increasing faster than current assets, the company will have fewer current assets to liquidate to meet its short-term obligations......

.....If this trend persists for too long, the company may have to borrow long-term debt to meet its short-term liabilities.

Which of the following is true about the leveraging effect? 1. Using leverage reduces a firm's potential for gains and losses. 2. Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth.

2. Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth.

What is the most commonly used base item for a common size income statement? 1. Total assets 2. Net sales 3. Stockholders' equity 4. Total liabilities

2. net sales

How would you expect this situation to affect the assessment of Eastern's financial condition and performance? 1. Being small, Eastern may lack the financial resources and media-management expertise to successfully defend itself in the lawsuit and the media. This could jeopardize Eastern's current and future sales and profits. 2. Although nonquantitative factors may be relevant to a company's financial evaluation in general terms, the details of this specific situation are not relevant to the firm's financial condition or performance. 3. Lawsuits guarantee free advertising and therefore should be guaranteed to increase the firm's current and future sales and profits.

1. Being small, Eastern may lack the financial resources and media-management expertise to successfully defend itself in the lawsuit and the media. This could jeopardize Eastern's current and future sales and profits.

Ratios that help determine whether a company can access its cash and pay its short-term obligations are called __________ ratios.

Liquidity

When a firm takes on leverage (borrows funds), it has to make interest payments on its debt. This interest is deducted as an expense from a company's earnings, or the earnings before interest and taxes (EBIT). This results in:

a lower taxable income than that exhibited by an otherwise identical unleveraged firm, as well as lower taxes.

Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called_______________ ratios.

asset management or activity

examples of asset management or activity ratios include:

company's days sales outstanding or average collection period, the inventory turnover ratio, and the fixed assets and total assets turnover ratios.

A very high current ratio:

could also signal that the firm is not managing its assets efficiently.

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called____________ ratios.

debt or financial leverage management

An increase in the current ratio:

does not always mean an improvement in the company's liquidity position.

Companies that have a lenient credit and collection policy have a _______ DSO, which could deprive the firm of critical funds and lead to cash flow problems. (high or low)

high

Which of the following asset classes is generally considered to be the least liquid? 1 Accounts receivable 2 Cash 3 Inventories

inventories

Companies that use debt funding are called _____________ companies and are riskier than unleveraged firms.

leveraged

Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with __________ debt ratios. (high / low)

low

_________ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.

market value or market based

You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with one key customer is considered to be _________ risky than companies with several customers.

more

If a firm takes steps that increase its expected future ROE, its stock price will ______________ increase.

not necessarily

___________ ratios help measure a company's ability to generate income and profits based on its invested capital.

profitability

A quick ratio of less than 1 means :

that the company does not have enough assets, excluding its inventory, to meet its short-term obligations.

A high current ratio means:

that the firm has a strong and safe liquidity position and that it can finance its short-term liabilities using its current assets.

Examples of liquidity ratios include:

the current ratio and the quick, or acid test, ratio

Examples of debt or financial leverage ratios include

the debt ratio, the debt-to-equity ratio, and the times-interest-earned ratio.

If this ratio is less than 1 and the current ratio is more than 1:

then the inventory constitutes a major part of the company's current assets. The company would have to depend on liquidating its inventory to meet its short-term obligations.