Finance 311 Chapter 3 Smartbook
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.
10 cents
Days' sales in receivables is given by the following ratio:
365 days/receivables turnover
The cash ratio is found by dividing cash by
Current liabilites
T/F: Financial ratios are computed using only balance sheet information
False
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?
It will increase
Long-term solvency ratios measure what aspect of the firm's financial position?
Its financial leverage
Profit margin equation
Net income/sales
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?
Non-cash expenses
Total asset turnover
Sales/Total Assets
The times interest earned ratio is a measure of long-term ____________.
Solvency
________ 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.
Which are used to compute the current ratio?
current assets and current liabilities so cash and accounts payable
The price earnings ratio is a _______ ratio
market value
How is the market-to-book ratio measured?
market value per share/book value per share
The price earnings ratio
price per share/earnings per share
The DuPont identity shows that _________ ___________ times total asset turnover times equity multiplier equals ROE
profit margin
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 or revenue
A common-size balance sheet expresses accounts as a percentage of _________
total assets
A firm may use a price-sales ratio when it has had
Negative
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.
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
If a company has had negative earnings for several periods they might choose to use a __________.
price-sales ratio
The DuPont identity breaks ROE into _________ parts
three
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.
A long time
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
Depeciation
The information needed to compute the profit margin can be found on the ____.
Income statement
Short-term solvency ratios are also called ________ ratios.
Liquidity
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.
T/F: The times interest earned ratio is EBIT minus interest.
False; EBIT/interest
T/F: Inventory turnover is sales divided by inventory.
False; cost of goods sold/inventory
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase
If a company has inventory, the quick ratio will always be ______ the current ratio.
Less than
How is the price earnings (PE) ratio computed?
Market price per share/earnings per share
Return on Assets (ROA)
Net income/total assets
Return on equity (ROE)
Net income/total equity
Return on assets (ROA) is a measure of _____.
Profitability
Receivables Turnover Ratio
Sales/accounts receivable
Which of the following are traditional financial ratio categories? financial leverage competition turnover profitability real options
financial leverage turnover profitability
Long-term solvency ratios are also known as
financial leverage ratios
The current ratio computes the relationship between __________.
Current assets and current liabilities
T/F: 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
T/F: If a company has inventory, the quick ratio will always be greater than the current ratio.
False
T/F: The current ratio will decrease if current assets increase, while everything else remains unchanged.
False
Which of the following is the correct representation of the total debt ratio?
(Total-assets-Total Equity)/(Total assets)
Cash coverage ratio
(EBIT+Depreciation)/Interest
Which of the following is (are) true of financial ratios: They are computed in the same manner They only use balance sheet data They are developed by a firm's financial info 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
T/F: The cash ratio is found by dividing cash by current liabilities.
True
Cal's Market has return on equity (ROE) of 15 percent. What does this mean? Multiple choice question.
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
T/F: In a common-size income statement, each item is expressed as a percentage of total sales.
True
T/F: The total debt ratio equals the total assets minus total equity all over total assets.
True
