Final Exam Review - Ch.3

which one of the following is a measure of long-term solvency?

cash coverage ratio

the ratios that are based on financial statement values and used for comparison purposes are called:

financial ratios

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

has positive net working capital

a common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets

which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

internal growth rate

the cash ratio is used to evaluate the:

liquidity of a firm

the sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

no new external equity and a constant debt-equity ratio

the equity multiplier is equal to:

one plus the debt-equity ratio.

the wood shop generates $.97 in sales for every $1 invested in total assets. which one of the following ratios would reflect this relationship?

total asset turnover

Common-size financial statements present all balance sheet account values as a percentage of:

total assets

the DuPont identity can be accurately defined as:

Equity multiplier × Return on assets.

which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

a decrease in the capital intensity ratio

which one of these statements is true concerning the price-earnings (PE) ratio?

a high PE ratio may indicate that a firm is expected to grow significantly

you would like to borrow money three years from now to build a new building. in preparation for applying for that loan, you are in the process of developing target rations for your firm. which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

cash coverage ratio = 2.6; debt-equity ratio = .3

which one of the following actions will increase the current ratio, all else constant? assume the current ratio is greater than 1.0

cash payments of an account payable

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

common-size income statement

which one of these transactions will increase the liquidity of a firm?

credit sales of inventory at cost

Philippe Organic Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364,182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2%. What is the current ratio?

current ratio = (total assets - net fixed assets) / (total assets - total equity - long-term debt) current ratio = (689400-512100)/(689400-364182-198375) current ratio = 1.40

which one of the following will increase the profit margin of a firm, all else held constant?

decrease in the tax rate

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

dividend payout ratio

a firm can increase its sustainable rate of growth by decreasing its:

dividends

all else held constant, which one of the following will decrease if a firm increases its net income?

price-earnings ratio

Which ratio was primarily designed to monitor firms with negative earnings?

price-sales ratio

Financial Statement Analysis

provides useful information that can serve as a basis for forecasting future performance.

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

quick ratio

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year

the sustainable growth rate is based on the premise that:

the debt-equity ratio will be held constant

Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

vary in direct relation to the net profit percentage

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

zero percent