Financial Policies Midterm Ch 3

Vera's 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?

$30/$3 = 10 times

What is the equation for computing return on assets (ROA)?

Net Income/Total Assets

Net Income/Sales

Profit Margin

What does it mean when a company reports ROA of 12%?

The company generates $12 in net income for every $100 invested in assets

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any other variables?

The total asset turnover will increase --> (because ratio is sales/assets so if sales increase the ratio will increase)

Sales/Assets

Total Asset Turnover

True or False: EBITDA is frequently used as a measure of cash flow available to meet financial obligations of a firm.

True

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

amortization expense and depreciation expense

Which of the following is the correct representation of the total debt ratio? a. Long-term debt/total assets b. (total assets - total equity)/(total assets) c. total equity/total long-term debt

b. (total assets - total equity)/(total assets)

How is market-to-book ratio measured? a. Book value per share/market value of per share b. market value of sales/book value of costs c. market value per share/book value per share d. market value of bonds/book value of bonds

c. market value per share/book value per share

Which of the following represents the receivables turnover ratio? a. accounts receivable/cost of goods sold b. cost of goods sold/accounts receivable c. sales/accounts receivable d. accounts receivable/sales

c. sales/accounts receivable

Which of the following items are used to compute the current ratio? (earnings, cash, equipment, accounts payable)

cash and accounts payable

Place the following items in the order they are placed form top to bottom on the liabilities and equity side of the statement of financial position: 1. Long term debt 2. Notes Payable 3. Owner's equity 4. Accounts Payable

1. Accounts Payable 2. Notes Payable 3. Long term debt 4. Owner's equity

Nestor's has net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

15.91% --> $315,000/$1.98m = 15.91%

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

4.00 times --> inventory turnover = COGS/inventory = $350,000/$87,500 = 4.00 times

Turner's return on equity is 12% and its retention is 60%. What is its sustainable growth rate?

7.76%

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 needed (EFN)?

= $405,000 --> $800,000 - $395,000 = 405,000

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

= 0.42 --> Debt ratio = debt/total assets. To find debt: =$48 + 125 -100 = $73. Assets: =$48 +$125 = $173 --> Debt ratio = 0.42

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.

= 0.6 --> Sales/assets = 600,000/1,000,000 = 0.6

Alpha Co. has interest expense of $1.2 million, total assets of $84 million, sales of $76 million, long-term debt of $16.4 million, and net income of $12.1 million. How will interest expense be recorded in the common-size income statement?

= 1.58% --> $1.2m/$76m = 1.58%

BC corporation's ROA is 22% and its plowback ratio is .5. What is its internal growth rate?

= 12.36% --> Internal growth rate = (ROA x b)/(1-ROA x b)

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

= 2.90 --> $250,000/$86,200 = 2.90

Which of the following items are used to compute the current ratio? (Earnings, equipment, accounts payable, cash)

Accounts payable and cash

What are three financial ratio categories?

Asset management ratios, profitability ratios, and market value ratios

Assets/Total Equity

Equity Multiplier

Which of the following is the correct representation of the cash coverage ratio? a. total interest expense/total cash b. EBIT/interest expense c. Total cash/total interest expense d. (EBIT + non-cash expenses)/interest expense

d. (EBIT + non-cash expenses)/interest expense

Which of the following are non-cash expenses on the income statement? (depreciation exp, income tax exp, amortization exp, interest exp)

depreciation expense and amortization expense

Given an internal growth rate of 3%, a firm can ________.

grow by 3% nor less without any additional external financing.

If a firm increases its debt-equity ratio, it will ______________ its sustainable growth? (Decrease, increase, or not affect)

increase

Enterprise value is the sum of a firm's market capitalization and the _______ value of its interest-bearing debt _________ any cash on hand.

market; less

The income statement measures ___________ over a specified period.

performance

EBITDA is a measure of __________ operating cash flow? (pretax or aftertax)

pretax

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

profitability

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

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

sizes