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Finance Flashcards

Finance 311 Final Exam Chapter 4

Liquid Asset An asset that can be converted to cash quickly without having to reduce the asset’s price very much.
Liquidity Ratios Ratios that show the relationship of a firm’s cad and other current assets to its current liabilities.
Asset Management Ratio A set of ratios that measure hoe effectively a firm is managing its assets.
Debt Management Ratios A set of ratios that measure how effectively a firm manages its debt.
Profitability Ratios A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
Market Value Ratios Ratios that relate the firm’s stock price to its earnings and book value per share.
The Price/Earnings (P/E) Ratio shows the dollar amount investors will pay for $1 of current earnings.
DuPont Equation A formula that shows that that the ROE can be found as the product of a profit margin, total assets turnover, and the equity multiplier. It shows the relationships among asset management, debt management and profitability ratios.
Benchmarking The process of comparing a particular company with a subset of top competitors in the industry.
Trend Analysis An analysis of a firms financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
A company exhibiting a high quality liquidity ratio means it is likely to have enough resources to pay off its short-term obligations. T/F? True
Asset management or activity ratios provide insights into managements efficiency in using a firms working capital and long-term assets. T/F? True
Debt or financial leverage ratios help analysis determine whether a company has sufficient cash to repay its short-term debt obligations. T/F? False
One possible explanation for an increase in a firms profitability ratios over a certain time span is that the company’s income has increases. T/F? True
Market-value or Market-based ratios help analysis figure out what investors and the markets think about the firms growth prospects and current and future operational performance. T/F? True
What represents a limit or weakness of ratio analysis? -A firm may operate in multiple industries. -Different firms may use different accounting practices. -Seasonal factors can distort data.-Window dressing might be in effect.
Ratios that help determines whether a company can access its cash and pay its debts that mature in less than a year are called _____ ratios. Liquidity
These ratios, which help determine who efficiently a firm is using its assets to generate sales are called_____ ratios. Asset Management or Activity
Ratios that help asses a company’s ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed b=versus invested financial capital are called _____ ratios. Debt or Financial Leverage Management
_____ ratios help measure a company’s ability to generate income and profits based on its invested capital. Profitability
_____ ratio 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
Which of the following if generally considered to be the least liquid?-A/R-Cash-Inventories Inventories
Most firms borrow money to finance some of their assets, and most will choose to borrow some long-term funds and some short-term funds. Which group of lenders would put greater emphasis on a firms liquidity ratio when evaluating a potential borrower?-short-term lenders-long-term lenders short-term lenders
Which of the following is generally considered to be least liquid?-Treasury Bills-Money market instruments-Real estate Real estate
Wy are ratios useful? (3) -to standardize numbers and facilitate comparisons-to highlight weaknesses and strengths-they’re made with competitors
Ratios help illustrate _____, _______ and ______ analysis. benchmark, industry, trend
“Can we make required payments?” Liquidity Ratios
“Right amount of assets vs sales?” Asset Management Ratios
“Right mix of debt and Equity? Debt Management Ratios
“Do sales exceed unit costs?” Profitability Ratios
“Are investors happy with R/E ratio and M/B ratios?” Market Value Ratios
There are _ categories of ratios 5
ROE=ROA when the company is financed entirely on equity, Dupont equation
ROE is almost always ______ than ROA higher
_____ does not consider risk or the amount of capital invested. ROE
ROE and _______ are correlated shareholders wealth
If given problems with ROE Managers might____ make investments that done benefit their shareholders
The M/B value per share is ______traded publicly
P/E and M/B are high if________is high and ________ is low expected growth and risk
Reducing the firms DSO would result in _____ cash freed up
Uses for freed up cash: (4) -repurchase stock-expand business-reduce debt-improve the stock price
the stock price can be improved by _______ and _______ – < # of stocks- the potential for foreigner profitability
Problems with Financial Ratio Analysis: (4) -firms operate in different divisions-different account and operating practices-is it “good” or “bad”?-difficult to determine if a company is weak, balanced or strong
________ performance is not necessarily good average
_________________ can distort data seasonal factors
“window dressing” techniques make statements and ratios look better than they are
_______ distorts many businesses balance sheets inflation

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