FIN 3403 CH. 3

Cal's market has return on equity (ROE) of 15%. What does this mean?

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

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

Financial statements

Which ratios use some information that is not contained in financial statements?

Market value ratios

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

Net income/ Total assets

What is the main difference between the cash coverage ratio and the times interest earned ratio?

Non-Cash Expenses

Alpha has assets of $102 million, net income of $4.3 million, and total assets of $97 million. Omega has assets of $12.4 million, net income of $0.76 million, and total sales of $9.3 million. Based on common-size income statements, which company is more profitable?

Omega

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

Performance evaluation

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

Sales / Total Assets

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

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

Standardized

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

common-size statements

The cash ratio is found by dividing cash by:

current liabilities

An important accounting goal is to report financial information to users in a way that is useful for __________.

decision making

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

depreciation

A common-base year financial statement presents items relative to a certain base, which is the:

dollar amount of each item during a common base year

A times interest earned (TIE) ratio of 3.5 times means a firm has ________ that is (are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

The EBITDA ratio is similar in spirit to:

the PE ratio

A firm has a total debt ratio of 0.30 times. This means the firm has ________ in total debt for every $1 in total assets.

$0.30

If Marley Company has a stock price of $12 per share, 100,000 shares outstanding, $432,000 in liabilities and $100,000 in cash, what is its enterprise value?

$1,532,000

Which two of the following groups are most interested in liquidity ratios?

-Bankers -Suppliers

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

-Cash -Accounts Payable

Which two of the following are most likely to create problems when comparing financial statements for multiple firms?

-Differing accounting methods -Differing fiscal years

Which of the following are traditional financial ratio categories?

-Market value ratios -Asset management ratios -Profitability ratios

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

.42

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

.60

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

1.15

Assume cash = $120, inventory = $470, accounts payable = $811, accounts receivable = $510, and total assets = $21,400. There are no other current assets. What is the current ratio?

1.36

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

1.50

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

10.71%

BK Trucking has total equity of $25,380 and 1,500 shares outstanding. Its stock is currently selling at $38 per share. What is the market-to-book ratio?

2.25

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 times

Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

2.90

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity (ROE)?

20.18%

Return on assets is 15%, equity multiplier is 1.4, what is the return on equity?

21.00%

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. What is the return on assets?

27.23%

AD corporation had sales of $750,000 and cost of goods sold of $350,000. Inventory at year end was $87,500. What is the inventory turnover?

4.00 times

Alpha Manufacturing has interest expense of $12 million, total assets of $184 million, sales of $176 million, long-term debt of $16.4 million, and net income of $15 million. How will interest expense be recorded in the common-size income statement?

6.82%

Rock Construction has current assets of $45 million, total liabilities and equity of $67 million, and sales of $59 million. How would current assets be expressed on a common-size balance sheet?

67%

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes.

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

created

Long-term solvency ratio are also known as:

financial leverage ratios

A ________ PE ratio may indicate that investors believe a company has better prospects for a future growth in earnings.

higher

As long as all sales requests are being met, a __________ inventory turnover ratio is better.

higher

A(n)______________in net profit margin will increase ROE.

increase

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be _________.

less than 1

Total Capitalization equals total equity plus total:

long-term debt

Whenever___________information is available, it should be used instead of accounting data.

market

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

market value

When a company has negative earnings for an extended period of time, analysts will often resort to the:

price-sales ratio

Return of equity (ROE) is a measure of __________.

profitability

The net income as shown on the common-size income statement of Omega Industries for the past three years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ________.

profitability

A common-size income statement helps compare financial results over time by controlling for changes in ________.

sales

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

sales

Financial managers use a common-size income statement to determine ________.

which costs are rising or falling as a percentage of sales