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Finance Flashcards

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The net present value of an investment represents the difference between the investment’s: cost and its market value
Net present value involves discounting an investment’s: future cash flows
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: recoup its initial cost
The average net income of a project divided by the project’s average book value is referred to as the project’s: average accounting return
The internal rate of return is the discount rate that results in a zero net present value for the project
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? discount rate
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as: multiple rates of return
. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? mutually exclusive
Which one of the following can be defined as a benefit-cost ratio? positive net present value
the net present value decreases as the required rate of return increases.
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? net present value
Which one of the following statements is correct? if the internal rate of return equals the required return, the net present value will equal zero.
If an investment is producing a return that is equal to the required return, the investment’s net present value will be: zero
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. profitability index is less than 1
Which one of the following indicators offers the best assurance that a project will produce value for its owners? positive NPV
Which one of the following statements is correct? The payback period ignores the time value of money.
Generally speaking, payback is best used to evaluate which type of projects? low cost, short term
Which one of the following is the primary advantage of payback analysis? ease of use
The payback method of analysis ignores which one of the following? time value of money
Which one of the following methods of analysis ignores the time value of money? payback
Which one of the following methods of analysis has the greatest bias toward short-term projects? payback
Which one of the following methods of analysis ignores cash flows? average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? average accounting return
the average accounting return measures profitability rather than cash flow
Which one of the following analytical methods is based on net income? average accounting return
Which one of the following is most closely related to the net present value profile? internal rate of return
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? The investment is mutually exclusive with another investment of a different size.
Which one of the following statements is correct? Assume cash flows are conventional. When the internal rate of return is greater than the required return, the net present value is positive.
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. . Internal rate of return that exceeds the required return
The modified internal rate of return is specifically designed to address the problems associated with unconventional cash flow
. The reinvestment approach to the modified internal rate of return: compounds all of the cash flows, except for the initial cash flow, to the end of the project.
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? Modified internal rate of return
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? NPV
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? the NPV of project a equals project B but generally doesnt equal zero
Which one of the following will occur when the internal rate of return equals the required return? the profitability index will equal 1
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The net present value is equal to zero.
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? The firm should increase in value each time it accepts a new project.
If a project with conventional cash flows has a profitability index of 1.0, the project will: have an internal rate of return that equals the required return
The profitability index reflects the value created per dollar: invested
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Internal rate of return and net present value
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? D. Net present value
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? D. Profitability index
In which one of the following situations would the payback method be the preferred method of analysis? investment funds availability only for a limited period of time
Which one of the following statements is correct? The payback method is biased toward short-term projects.
Which one of the following indicates that an independent project is definitely acceptable? Profitability index greater than 1.0
What is the net present value of a project with the following cash flows if the discount rate is 15 percent? year 0 -481001 156002 289003 15200 NPV = – $48,100 + $15,600 / 1.15 + $28,900 / 1.152 + $15,200 / 1.153NPV = -$2,687.98
What is the net present value of a project with the following cash flows if the discount rate is 13.6 percent?0 -636001 182002 345003 35900 NPV = -$63,600 + $18,200 / 1.136 + $34,500 / 1.1362 + $35,900 / 1.1363NPV = $3,643.38
What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? C. $1,992.43NPV = -$42,700 + $9,250 {1 – [1 / (1 + .1465)9]} / .1465 NPV = $1,992.43
Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project’s net present value? NPV = -$211,600 + $151,000 / 1.1864 + $151,000 / 1.1865 + $151,000 / 1.1866 NPV = -$16,670.67
Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project’s net present value at a required rate of return of 14.8 percent? NPV = -$62,000 + $16,500 / 1.148 + $23,800 / 1.1482 + $27,100 / 1.1483 + $23,300 / 1.1484 NPV = $1,758.71
What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent?0 -620001 165002 238003 271004 23300 NPV5% = -$23,600 + $8,200 / 1.05 + $9,100 + 1.052 + $10,600 / 1.053NPV5% = $1,620.17 NPV5% = -$23,600 + $8,200 / 1.15 + $9,100 + 1.152 + $10,600 / 1.153NPV5% = -$2,618.99
Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $2.8 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 12.5 percent. What is the benefit of the remodeling project to Professional Properties? NPV = -$2,800,000 + $820,000 {1 – [1 / (1 + .125)5]} / .125 NPV = $119,666.04
A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $42,500 a year. What is the net present value of this project at a discount rate of 11.6 percent? NPV = -$49,000 + (-$18,700 / 1.116) + $42,500 / 1.1162 + $42,500 / 1.1163 + $42,500 / 1.1164 NPV = $26,343.72
Molly is considering a project with cash inflows of $811, $924, $638, and $510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is $2,700? NPV = -$2,700 + $811 / 1.112 + $924 / 1.1122 + $638 / 1.1123 + $510 / 1.1124NPV = -$425.91
Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year. What is the project’s NPV at a discount rate of 0 percent? At 5 percent? At 10 percent? $5,400; $1,045.91; -$2,641.47NPV0% = -$37,800 + $11,600 / 1.0 + $11,600 / 1.02 + $20,000 / 1.03NPV0% = $5,400 NPV5% = -$37,800 + $11,600 / 1.05 + $11,600 / 1.052 + $20,000 / 1.053NPV5% = $1,045.91 NPV10% = -$37,800 + $11,600 / 1.10 + $11,600 / 1.102 + $20,000 / 1.103NPV10% = -$2,641.47
Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project? . Both Joe and Rich
. You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment? NPV = -$110,000 + $48,000 / 1.146 + $52,500 / 1.1462 + $55,000 / 1.1463 + (-$900 / 1.1464) NPV = $7,881.55
What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent?0 -324001 106202 158003 -31104 26600 NPV = -$32,400 + $10,620 / 1.114 + $15,800 / 1.1142 + (-$3,110 / 1.1143) + $26,600 / 1.1144 NPV = $4,887.26
The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? 4.23 yearsPayback = 4 + ($46,700 -10,000 -10,000 -12,000 -12,000)/$12,000 = 4.23 years
Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? The project never pays back.The project never pays back because the total cash inflow is only $422,000.
Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period? Payback = $284,000/$50,500 = 5.62 years
. EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project? Payback = 5 + ($419,000 -0 -0 -69,000 -98,000 -109,000)/$145,000 = 5.99 years
China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years. Should the firm expand at this time? Why or why not? Yes; because the money will be recovered in 2.10 yearsPayback = 2 + ($215,000 -60,000 -140,000)/$150,000 = 2.10 years Yes, the company should accept the expansion project because it pays back within the required 2.5 years.
Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? Payback = 2 + ($26,000 -2,500 -11,700)/$13,500 = 2.87 years
Delta Mu Delta is considering purchasing some new equipment costing $393,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return? AAR = [($16,900 + 25,300 + 27,700 + 18,400)/4]/[($393,000 + 0)/2] = .1123, or 11.23 percent
Auto Detailers is buying some new equipment at a cost of $188,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years. What is the average accounting rate of return? [(4 ×$11,000) + (4 ×$24,000)] / 8}/{($188,900 + 0)/2} = .1853, or 18.53 percent
Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $169,700. This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value. The annual net income from this equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not? AAR = [($7,100 + 13,300 + 18,600 + 19,200)/4]/[($169,700 + 0)/2] = .1715, or 17.15 percent Because the AAR is less than the required rate, the equipment should not be purchased.
. Any changes to a firm’s projected future cash flows that are caused by adding a new project are referred to as: incremental cash flows.
. Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? Stand-alone principle
. A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): sunk cost.
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Opportunity cost
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? Erosion
pro forma financial statement is a financial statement that: projects future years’ operating results.
. The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: tax shield
Which one of the following refers to a method of increasing the rate at which an asset is depreciated? Accelerated cost recovery system
Forecasting risk is best defined as: estimation risk.
. Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: scenario analysis
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project’s net present value. What type of analysis is being conducted? Sensitivity analysis
The opportunities that a manager has to modify a project once the project has started are called: managerial options.
Contingency planning focuses on the: managerial options implicit in a project.
Which one of the following refers to the option to expand into related businesses in the future Strategic option
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm? capital rationing
Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: soft rationing.
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with: hard rationing.
The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of: the research and development costs to produce the current winter footwear samples.
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of: a percentage of the current operating overhead.
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? The current market value of the land
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? Sunk
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. Money spent last month repairing a damaged front fender
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project? Current market value of the building
24. Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized. Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today’s dollars. The estimated present value of the cash inflows from the renovated restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant? . $1.1 million
5. Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women’s store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept? Exclusive gifts only
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost: of the blueprints that have been drawn of the expansion area.
Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the: ticket sales for the new coaster.
The analysis of a new project should exclude: sunk costs
The net working capital invested in a project is generally: recouped at the end of the project.
A proposed project will increase a firm’s accounts payables. This increase is generally: . a cash inflow at Time zero and a cash outflow at the end of the project.
Which of the following create cash inflows from net working capital? . Increase in accounts payable and decrease in inventory
The pro forma income statements for a proposed investment should include all of the following except: changes in net working capital.
Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years. The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76. Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects. Given this, you know the: operating cash flow of Firm A is greater than that of Firm B for Year 3.
Assume an all-equity firm has positive net earnings. The operating cash flow of this firm: increases when the tax rate decreases.
The operating cash flows of a project: include erosion effects.
The tax shield approach to computing the operating cash flow, given a tax-paying firm: recognizes that depreciation creates a cash inflow.
Which one of the following will increase the operating cash flow as computed using the tax shield approach? Decrease in fixed costs
Scenario analysis is best described as the determination of the: reasonable range of project outcomes
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? Lowest expected value for fixed costs
. Scenario analysis asks questions such as: What is the best outcome that should reasonably be expected?
Scenario analysis helps determine the reasonable range of expectations for a project’s anticipated outcome
Sensitivity analysis helps identify the variable within a project that presents the greatest forecasting risk
Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement? Option to abandon
Ignoring the option to wait may underestimate the net present value of a project.
45. Which one of these has the least potential to increase the net present value of a proposed investment? Assume the project has a positive net present value in at least one set of circumstances. Option to discontinue a project at the end of its intended life
The ability to delay an investment: is valuable provided there are conditions under which the investment will have a positive net present value.
. Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation? Division managers should expect to be treated equally, at least initially, in the capital distribution process.
When a firm faces hard rationing,: . there will be no available funds for capital expenditures
. The Green Tomato purchased a parcel of land six years ago for $389,900. At that time, the firm invested $128,000 grading the site so that it would be usable. Since the firm wasn’t ready to use the site itself at that time, it decided to lease the land for $48,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $415,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land? $415,000
Six years ago, China Exporters paid cash for a new packaging machine that cost $347,000. Three years ago, the firm spent $14,300 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months. The estimated value of the machine today is $157,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project? $157,500
The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project? 480
. Custom Tailored Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $21,000 of T-shirts, $18,000 of sweatshirts, and $2,900 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $18,000 of T-shirts, $16,000 of sweatshirts, $11,500 of Polo shirts, and $2,100 of caps. What sales amount should be used when evaluating the Polo shirt project? $5,700
Green Woods sells specialty equipment for mountain climbers. Its sales for last year included $387,000 of tents and $718,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $411,000 of tents, $806,000 of climbing gear, and $128,000 of sleeping bags. How much of next year’s sales are derived from the side effects of adding the new product to its sales offerings? $112,000
Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, decrease accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project? -$21,000
A nine-year project is expected to generate annual revenues of $137,800, variable costs of $82,600, and fixed costs of $11,000. The annual depreciation is $23,500 and the tax rate is 34 percent. What is the annual operating cash flow? Operating cash flow = ($137,800 -82,600 -11,000) x (1 -.34) + ($23,500 x .34) = $37,162
A debt-free firm has net income of $107,400, taxes of $38,700, and depreciation of $19,300. What is the operating cash flow? Operating cash flow = $107,400 + $19,300 = $126,700
. Rock Haven has a proposed project that will generate sales of 1,840 units annually at a selling price of $31 each. The fixed costs are $13,400 and the variable costs per unit are $7.47. The project requires $32,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $8,500 and the tax rate is 35 percent. What is the operating cash flow for Year 4? OCF4 = {[1,840 x ($31 -7.47] – $13,400} x {1 -.35} + {$32,000/4 x .35} = $22,231.88
On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? Risk premium
The variance is the average squared difference between which of the following? A. Actual return and average return
3. Which one of the following is the positive square root of the variance? Standard deviation
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? Normal distribution
Which one of the following is defined as the average compound return earned per year over a multiyear period? Geometric average return
Which one of the following best describes an arithmetic average return? Return earned in an average year over a multiyear period
An efficient capital market is best defined as a market in which security prices reflect which one of the following? All available information
Which one of the following is the hypothesis that securities markets are efficient? Efficient markets hypothesis
Which one of the following combinations will always result in an increased dividend yield? Decrease in the stock price combined with a higher dividend amount
Which one of the following could cause the total return on an investment to be a negative rate? Stock price that declines over the investment period
Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment? Without the size of an investment, the dollar return has less value than the percentage return.
12. Which answer creates a false sentence? Percentage returns: are difficult to compute.
One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: sum of the dividend yield and the capital gains yield is 3.1 percent.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: stocks of the 500 companies included in the S&P 500 index
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Small-company stocks
. Over the period of 1926-2014: long-term government bonds underperformed long-term corporate bonds.
Over the period of 1926-2014: the risk premium on stocks exceeded the risk premium on bonds.
The rate of return on which one of the following has a risk premium of 0%? . U.S. Treasury bills
Which one of the following had a zero standard deviation of returns for the period of 1926-2014? All of the listed security types had a standard deviation of returns in excess of zero percent.
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014? small company stocks
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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
Categories
Finance Flashcards

Finance 1

T Opportunity costs refer to what a person gives up when making a decision T/F
F The financial planning process is complete once you implement your financial plan T/F
T Liquidity is the ability to convert financial resources into usable cash with ease T/F
C The first step of the financial planning process is to A Saving and investing for future needsB implement a Financial planC Analyze your current personal and financial situationD Evaluate and revise your actionsE Create a financial plan of action
E The uncertainty associated with decision making is referred to as:A Opportunity CostB selection alternativesC financial goalsD personal valuesE Risk
A Changes in income, values, and family situation make it necessary to A Evaluate and revise your actionsB Implement the financial planC Develop financial goalsD Analyze your current personal and financial situationE Create a financial plan of action
D An example of a personal opportunity cost would be:A interest lost by using savings to make a purchaseB Higher earnings on savings that must be kept on deposit a minimum of 6 monthsC Lost wages due to continuing as a full time studentD Time comparing several brands of personal computersE changing demographic trends in our society
C Liquidity refers to A The earnings on savingsB The risk on an investmentC The ease of converting a financial resource into cashD The amount of insurance coverage a person hasE A persons inability to pay his or her debts
T A job tends to have less of a long term commitment to a field than a careerT/F
F Changes in family size and marriage rates have not affected the types of jobs that are in demandT/F
F Corporate culture refers to the methods used by an organization to determine the value of employee benefitsT/F
F A mentor refers to the person who is assigned to orient a new person to an organizationT/F
E The first step of the career planning process is to A Evaluate the job marketB Identify potential job opportunitiesC Develop a resume and cover letterD Plan for career growthE Assess your interests, abilities and goals
D A lack of willingness to accept a variety of employment positions is a common career planning mistake associated with weakA Common senseB CommunicationC trainingD FlexibilityE Perseverance
E Which of the following trends is most likely to increase opportunities in manufacturing organizationsA Higher interest ratesB Reduced consumer spendingC Higher consumer spendingD increased importsE increased exports
C Efficient work habits are an attempt of:A On-the-job trainingB Continuing EducationC An employee’s initiativeD Cooperative Education
C Special class projects can be presented on a resume as _____________ experienceA financial planningB SupervisingC ResearchD Personal AdministrationE Budgeting
F Money management activities refers to a long-term investment decisionsT/F
T Insolvency is a result of having more liabilities than assetsT/F
A Liabilities are amounts representing A DebtsB Items of ValueC Living expensesD Taxable incomeE Current assets
F T/F Taxes should only be considered in financial planning in April
F T/F The principal purpose of taxes is to control economic conditions
F T/F Gift amounts over $10,000 are exempt from federal taxes
F T/F Taxable income is the total earnings of a person
F T/F Exemptions are expenses that a taxpayer is allowed to deduct from Adjusted Gross income
T T/F A tax credit is an amount subtracted directly from the amount of taxes owed
F T/F The simplest federal tax return form is the 1040A
F 8. F The Amount of a person’s standard deductions is determined on Schedule A of Form 1040.
T T/F Capital gains refers to profits from sale of investments
T T/F Higher returns on savings will usually result in less liquidity
F T/F A ‘free’ checking account with a minimum balance of $500 has an opportunity cost of lost interest
T T/F Savings and loan associations offer mortgages
T T/F Credit Unions frequently offer lower loan rates than other financial institutions
F T/F Credit cards are a form of revolving credit but Home Equity loans are not
T T/F Credit disability insurance makes loan payments that make loan payments while you are injured or sick
Categories
Finance Flashcards

Intro to Finance Ch 4

Considered alone, which of the following would increase a company’s current ratio?a. An increase in net fixed assets.b. An increase in accrued liabilities.c. An increase in notes payable.d. An increase in accounts receivable.e. An increase in accounts payable. d. An increase in accounts receivable.
Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant? a. The TIE declines.b. The DSO increases.c. The quick ratio increases.d. The current ratio declines.e. The total assets turnover decreases. c. The quick ratio increases.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? a. Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.b. Use cash to repurchase some of the company’s own stock.c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.e. Use cash to increase inventory holdings. d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Which of the following statements is CORRECT?a. A reduction in inventories would have no effect on the current ratio.b. An increase in inventories would have no effect on the current ratio.c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT?a. Company E probably has fewer growth opportunities.b. Company E is probably judged by investors to be riskier.c. Company E must have a higher market-to-book ratio.d. Company E must pay a lower dividend.e. Company E trades at a higher P/E ratio. e. Company E trades at a higher P/E ratio.
Which of the following statements is CORRECT?a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.”b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of “window dressing.”d. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”e. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value. b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company’s total assets or operating income. Which of the following effects would occur as a result of this action?a. The company’s current ratio increased.b. The company’s times interest earned ratio decreased.c. The company’s basic earning power ratio increased.d. The company’s equity multiplier increased.e. The company’s debt ratio increased. a. The company’s current ratio increased.
A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?a. Increase accounts receivable while holding sales constant.b. Increase EBIT while holding sales and assets constant.c. Increase accounts payable while holding sales constant.d. Increase notes payable while holding sales constant.e. Increase inventories while holding sales constant. b. Increase EBIT while holding sales and assets constant.
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.a. The division’s basic earning power ratio is above the average of other firms in its industry.b. The division’s total assets turnover ratio is below the average for other firms in its industry.c. The division’s debt ratio is above the average for other firms in the industry.d. The division’s inventory turnover is 6, whereas the average for its competitors is 8.e. The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30. a. The division’s basic earning power ratio is above the average of other firms in its industry.
Which of the following would indicate an improvement in a company’s financial position, holding other things constant?a. The inventory and total assets turnover ratios both decline.b. The debt ratio increases.c. The profit margin declines.d. The times-interest-earned ratio declines.e. The current and quick ratios both increase. e. The current and quick ratios both increase.
If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT?a. The lower the company’s inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm.b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge.c. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge.d. The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge.e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. c. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge.
Which of the following statements is CORRECT?a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant.b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm’s ability to pay current interest is affected by taxes.e. All else equal, increasing the debt ratio will increase the ROA b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.b. Issue new common stock and use the proceeds to increase inventories.c. Speed up the collection of receivables and use the cash generated to increase inventories.d. Use some of its cash to purchase additional inventories.e. Issue new common stock and use the proceeds to acquire additional fixed assets. a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?a. Borrow using short-term notes payable and use the proceeds to reduce accruals.b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.c. Use cash to reduce accruals.d. Use cash to reduce short-term notes payable.e. Use cash to reduce accounts payable. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
Which of the following statements is CORRECT?a. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm’s credit terms.c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline. e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Which of the following statements is CORRECT?a. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.b. A firm’s use of debt will have no effect on its profit margin.c. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.d. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.e. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets. c. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
Which of the following statements is CORRECT?a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.d. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate.e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
Which of the following statements is CORRECT?a. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.b. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.c. The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.d. Other things held constant, an increase in the debt ratio will result in an increase in the profit margin.e. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease. a. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
You observe that a firm’s ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?a. Its total assets turnover must be above the industry average.b. Its return on assets must equal the industry average.c. Its TIE ratio must be below the industry average.d. Its total assets turnover must be below the industry average.e. Its total assets turnover must equal the industry average. a. Its total assets turnover must be above the industry average.
Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?a. Company HD has a lower total assets turnover than Company LD.b. Company HD has a lower equity multiplier than Company LD.c. Company HD has a higher fixed assets turnover than Company LD.d. Company HD has a higher ROE than Company LD.e. Company HD has a lower operating income (EBIT) than Company LD. d. Company HD has a higher ROE than Company LD.
Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?a. The ROA will decline.b. Taxable income will decline.c. The tax bill will increase.d. Net income will decrease.e. The times-interest-earned ratio will decrease. c. The tax bill will increase.
Which of the following statements is CORRECT?a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.d. An increase in the DSO, other things held constant, could be expected to increase the ROE.e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin. e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?a. Without more information, we cannot tell if HD or LD would have a higher or lower net income.b. HD would have the lower equity multiplier for use in the DuPont equation.c. HD would have to pay more in income taxes.d. HD would have the lower net income as shown on the income statement.e. HD would have the higher operating margin. d. HD would have the lower net income as shown on the income statement.
Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?a. Company HD pays less in taxes.b. Company HD has a lower equity multiplier.c. Company HD has a higher ROA.d. Company HD has a higher times-interest-earned (TIE) ratio.e. Company HD has more net income. a. Company HD pays less in taxes.
Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?a. Company HD has a lower equity multiplier.b. Company HD has more net income.c. Company HD pays more in taxes.d. Company HD has a lower ROE.e. Company HD has a lower times-interest-earned (TIE) ratio. e. Company HD has a lower times-interest-earned (TIE) ratio.
Which of the following statements is CORRECT? a. If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
Which of the following statements is CORRECT?a. A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.c. If a firm’s fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. d. The more conservative a firm’s management is, the higher its debt ratio is likely to be.e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time. e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Which of the following statements is CORRECT?a. Other things held constant, the more debt a firm uses, the higher its operating margin will be.b. Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.c. Other things held constant, the more debt a firm uses, the higher its profit margin will be.d. Other things held constant, the higher a firm’s debt ratio, the higher its TIE ratio will be.e. Debt management ratios show the extent to which a firm’s managers are attempting to reduce risk through the use of financial leverage. The higher the debt ratio, the lower the risk. b. Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.
Which of the following statements is CORRECT?a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be.b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.c. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder’s viewpoint, than the return on total assets (ROA).d. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth.e. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A’s debt ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin. b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Which of the following statements is CORRECT?a. In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.b. The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects. c. The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed. d. The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being more risky and/or less likely to enjoy higher future growth.e. It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. c. The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?a. 2.04b. 2.14c. 2.26d. 2.38e. 2.49 d. 2.38
Beranek Corp has $720,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?a. $273,600b. $288,000c. $302,400d. $317,520e. $333,396 b. $288,000
Ajax Corp’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm’s times-interest-earned (TIE) ratio?a. 4.72b. 4.97c. 5.23d. 5.51e. 5.80 e. 5.80
Royce Corp’s sales last year were $280,000, and its net income was $23,000. What was its profit margin?a. 7.41%b. 7.80%c. 8.21%d. 8.63%e. 9.06% c. 8.21%
River Corp’s total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?a. 7.89%b. 8.29%c. 8.70%d. 9.14%e. 9.59% a. 7.89%
X-1 Corp’s total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?a. 11.70%b. 12.31%c. 12.96%d. 13.61%e. 14.29% c. 12.96%
Zero Corp’s total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?a. 14.82%b. 15.60%c. 16.42%d. 17.28%e. 18.15% d. 17.28%
Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?a. $41,234b. $43,405c. $45,689d. $48,094e. $50,625 e. $50,625
Song Corp’s stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?a. 17.17b. 18.08c. 18.98d. 19.93e. 20.93 b. 18.08
Hoagland Corp’s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?a. 1.34b. 1.41c. 1.48d. 1.55e. 1.63 a. 1.34
Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm’s ROE?a. 15.23%b. 16.03%c. 16.88%d. 17.72%e. 18.60% c. 16.88%
Meyer Inc’s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?a. $158,750b. $166,688c. $175,022d. $183,773e. $192,962 a. $158,750
Helmuth Inc’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?a. $2.14b. $2.26c. $2.38d. $2.50e. $2.63 d. $2.50
Garcia Industries has sales of $200,000 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?a. $241.45b. $254.16c. $267.54d. $281.62e. $296.44 e. $296.44
Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.a. 21.27b. 22.38c. 23.50d. 24.68e. 25.91 b. 22.38
Han Corp’s sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO – Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.a. 12.94b. 13.62c. 14.33d. 15.09e. 15.84 d. 15.09
Wie Corp’s sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?a. $201,934b. $212,563c. $223,750d. $234,938e. $246,684 c. $223,750
A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio (measured as debt/assets) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a. 41.94%b. 44.15%c. 46.47%d. 48.92%e. 51.49% e. 51.49%
Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?a. 9.45%b. 9.93%c. 10.42%d. 10.94%e. 11.49% a. 9.45%
Last year Ann Arbor Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?a. 11.51%b. 12.11%c. 12.75%d. 13.42%e. 14.09% d. 13.42%
Brookman Inc’s latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding, and its debt/assets ratio was 44%. How much debt was outstanding?a. $4,586,179b. $4,827,557c. $5,081,639d. $5,349,094e. $5,630,625 e. $5,630,625
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s total-debt-to-total-assets ratio was 45.0%. Based on the DuPont equation, what was the ROE?a. 13.82%b. 14.51%c. 15.23%d. 16.00%e. 16.80% a. 13.82%
Last year Rennie Industries had sales of $305,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt/assets ratio, sales, and costs remained constant, how much would the ROE have changed?a. 4.10%b. 4.56%c. 5.01%d. 5.52%e. 6.07% b. 4.56%
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $295,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed?a. 6.55%b. 7.28%c. 8.09%d. 8.90%e. 9.79% c. 8.09%
Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?a. 2.13%b. 2.35%c. 2.58%d. 2.84%e. 3.12% a. 2.13%
Last year Kruse Corp had $305,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?a. 2.85%b. 3.00%c. 3.16%d. 3.31%e. 3.48% c. 3.16%
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Finance Flashcards

Personal Finance, Chapter 13

The major advantage of mutual funds to the small investor is diversification
In The Wall Street Journal’s listing of mutual funds, a “t” after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. b and c
Value funds look for stocks with relatively all the following except rapid growth
The approximate yield on a mutual fund depends only on the fund’s dividend income and capital gains distributions. False
A mutual fund’s NAV is its net asset value
A fund’s prospectus would provide information about a fund’s fee structure. True
A(n) ____ actually runs the portfolio and makes the buy and sell decisions. management company
A closed-end investment company can create an unlimited number of shares. False
A mutual fund prospectus is required to fully disclose all fund fees and expenses. True
A balanced fund that emphasizes growth in capital is called a(n) growth and income fund
Financial leverage is less of a factor in real estate investment returns than with other types of investments. False
The fund whose main objective is growth is known as a(n) ____ fund. index
Growth-and-income funds invest most of their capital in common stocks. True
Spiders and Diamonds are examples of ETFs. True
A technology fund is an example of a sector fund. True
Generally speaking, socially responsible funds abstain from investing in alcohol, gambling, or tobacco stocks. True
A no-load fund has no charge to sell you shares
Exchange-traded funds have characteristics of both closed-end and open-end funds. True
The share price of a closed-end fund is determined by a and c
Most mutual funds allow investors to participate in a and b
The lower the R2, the closer the relationship between an ETF and its associated target index. False
Investors tend to use mutual funds for which of the following reasons all of these
A(n) ____ fund invests primarily in a portfolio of common stocks for the income they provide. equity-income
Advantages of exchange-traded funds over mutual funds include all of the following except better diversification
The net asset value (NAV) per share is found by dividing the market value of the fund’s securities less the fund’s liabilities by the number of shares outstanding. True
Asset allocation funds invest entirely in U.S. and foreign stocks and bonds. False
Aggressive growth funds typically buy stocks with high price/earnings ratios and stocks with volatile price fluctuations. True
By using automatic reinvestment plans, dividend and capital gains are used to automatically buy additional shares in the fund. True
While ETFs offer many of the benefits of mutual funds, they have the tax-timing disadvantages not present with otherwise comparable mutual funds. False
Redeeming your mutual fund shares might result in a charge called a back-end load
Closed-end investment companies are characterized by availability for sale or purchase on security markets
The major reason that investors use mutual funds is their contractual plans, which force regular investing. False
Which of the following bond mutual funds would provide tax-free income? municipal bond fund
An investor with a small amount of money should stick to using load funds instead of no-load funds. False
An investment option that allows fund shareholders to funnel fixed amounts of money from their paychecks or bank accounts automatically into a mutual fund is a(n) automatic investment plan
There are more closed-end investment companies than there are open-end companies. False
Future fund performance is the real key to investment success with mutual funds. One important element to examine when attempting to predict a fund’s future performance is the future course of the market
A fund that invests only in a particular industry would be a ____ fund. sector
The price per share of a closed-end investment fund could be lower than its NAV. True
In The Wall Street Journal’s listing of mutual funds, a “p” after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. 12b-1 fee
What type of REIT is most attractive to income-oriented investors? mortgage
Indexed funds have high realized capital gains. False
Advantages of exchange traded funds over mutual funds include a broader market focus. False
A mutual fund cannot charge more than 6.5 percent in total sales charges and fees. False
Open-ended mutual funds companies buy their shares back from investors at NAV. True
The expected cash flows of a real estate investment are determined by rent, depreciation, and taxes. True
Global mutual funds can invest both in domestic and international stocks. True
In The Wall Street Journal’s listing of mutual funds, an “r” after the mutual fund name and before the NAV means that the particular mutual fund has a ____ associated with it. back-end load
____ would not be a reason for purchasing mutual funds. tax advantage
Dividend income and capital gains distributions are taxed at identical tax rates. False
Balanced funds invest in a proportionate amount of common and preferred stocks and bonds. True
It is almost impossible to lose money in a mutual fund as the result of fraud or the mutual fund company’s bankruptcy. True
Low-load funds do not charge a commission upon initial purchase. False
The primary investment objective of bond funds is income. True
The current market value of all the securities a mutual fund owns is called the net asset value
A closed-end investment company that invests in various types of real estate and mortgages is a hybrid real estate investment trust
Mutual funds do not offer guaranteed performance
With open-end mutual funds, investors cannot lose more than they invested. True
The fund whose main objective is to simply match the market known as a(n) ____ fund. index
Value funds typically invest in stocks that do not pay dividends and have a high price/earnings ratio. False
Index funds are actively managed. False
Asset allocation funds invest money in all of these
An open-end investment company is commonly known as a mutual fund. True
Which of the following are characteristic of exchange-traded mutual funds? traded on listed exchanges
A mutual fund allows investors to become owners of a widely diversified portfolio of securities
The primary purpose of investing in income property is to produce an attractive annual cash flow. True
Socially responsible funds typically avoid investing in alcohol and tobacco stocks
The objective of bond and money market funds is growth. False
A mutual fund’s price per share will increase if its underlying holdings increase in value. True
Open-ended mutual funds can be traded on an intraday basis. False
An annual fee charged by some mutual funds to cover marketing and distribution expenses is the 12b-1 fee
Which of the following is not a source of mutual fund returns? changes in IDB
The size of a mutual fund’s management fee is related to the fund’s performance. False
What would the NAV of an open-ended mutual fund priced at $10 be if the load is 4%? $9.60
All no-load funds charge an upfront fee to purchase shares of a mutual fund. False
Index funds have provided competitive rates of return because all of these
All mutual funds have management fees. True
The ____ is a service offered by mutual funds that helps investors earn compound interest on their investments. automatic reinvestment plan
A(n) ____ fund is quite speculative. aggressive growth
Conversion privileges allow investors to exchange one fund’s shares for that of another, as long as the funds are in the same fund family. True
More people invest in mutual funds than in any other type of investment product. True
Equity-income funds emphasize capital appreciation in their investment goals. False
A mutual fund’s NAV is calculated at least once a day
First-time real estate investors should consider investing in commercial properties. False
Exchange-traded funds can create new shares to meet demand. True
Another name for a mutual fund is an open-end investment company
Mutual fund conversion privileges can often be exercised online. True
A downside of investing in income property is maintenance costs
A behavioral bias in mutual fund investing where investors view recent performance as overly indicative of a fund’s future performance is known as representativeness
Exchange-traded mutual funds are actually closed-end mutual funds. False
Asset allocation funds concentrate on one type of investment. False
Growth funds are mutual funds designed for short-term investing. False
If you are a mutual fund investor who needs steady income, you might take advantage of a fund’s systematic withdrawal plans.
For most investors, the best way to deal in foreign securities is through an international mutual fund. True
If a mutual fund provides for automatic reinvestment, the reinvested dividends will not be taxed until the shares are redeemed. False
ETFs are set up to protect investors from capital gains taxes better than most mutual funds can. True
A(n) ____ sells fund shares, either directly to the public or through certain authorized dealers. distributor
The price an investor can sell his shares of an open-end mutual fund is the net asset value. True
A mutual fund with an objective of both growth and income is a(n) balanced fund
To be a true no-load fund, there can be a maximum ____ load and a maximum ____ 12(b)-1 fee. 0%; 0.25%
Both load and no-load funds will always charge a management fee
A real estate investment trust that invests only in mortgages is called an equity trust. False
Which of the following combines the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund? exchange-traded fund
An example of a commercial property is a(n) all of these
Money funds are high in both liquidity and risk. False
Expected cash flows from real estate investments are determined by all of these
A 12b-1 fee can only be charged by a load mutual fund. False
Closed-end mutual funds companies buy their shares back from investors at NAV. False
The major benefit to small investors of mutual funds is diversification. True
Dividend income, capital gains distributions, and changes in the fund’s share price are all sources of return for a mutual fund. True
A mutual fund is owned by the management company. False
Speculating in raw land is a low-risk investment approach. False
Closed-end mutual funds can trade at either a discount or a premium from their net asset value. True
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Finance Flashcards

VB Personal Finance Intro to Investing (Reading Quiz)

QUESTION 1 of 10: Front end loads: d) Are paid to the mutual fund company when you first purchase the fund
QUESTION 2 of 10: You can tell a scam or fraud because: b) It may tell you that you have won a lottery you never entered, or try to get you to tell your account and personal information
QUESTION 3 of 10: FDIC is: c) A government insurance program that will pay back account holders if the bank or lending institution fails
QUESTION 4 of 10: A money market account: c) Can have a minimum deposit requirement and variable interest, and generally pays a better interest rate than a savings account
QUESTION 5 of 10: Financial goals help savings grow by: b) Helping investors concentrate on the goal, instead of immediately spending money
QUESTION 6 of 10: Money market refers to: a) A collection of highly liquid short term investments
QUESTION 7 of 10: True of False: Savings accounts generally offer a higher yield than money market accounts. b) False
QUESTION 8 of 10: Savings accounts at banks are protected by: a) FDIC insurance
QUESTION 9 of 10: True or False: All investments eventually increase in value if held long enough. b) False
QUESTION 10 of 10: Inflation is: b) A number measured by the government that describes the changing prices of everyday goods.
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Finance Flashcards

Managerial Finance: Chapter 1

A sole proprietor has unlimited liability; his or her total investment in a business, but not his or her personal assets, can be taken to satisfy creditors. False
The financial manager must look beyond financial statements to obtain insight into developing or existing problems since the accrual accounting data do not fully describe the circumstances of a firm. True
Managerial finance ________. involves tasks such as budgeting, financial forecasting, cash management, and funds procurement
Which of the following is true of a partnership and a corporation? In a partnership, income is taxed at the corporate level; whereas, in a corporation, income is taxed twice.
Which of the following is true of cash flows and risk? High cash flow and low risk result in an increase in share price.
Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. $3,000 and -$7,000, respectively
Investment decisions generally refer to the items that appear on the ________. left-hand side of the balance sheet, and financing decisions relate to the items on the right-hand side
The board of directors is responsible for managing day-to-day operations and carrying out the policies established by the chief executive officer. False
Cash flows and risk are the key determinants in share price. Increased risk, other things remaining the same, results in ________. a lower share price
Corporate ethics policies typically apply to ________ in dealing with ________. employee actions; all corporate constituents
A capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed asset investments. True
Institutional investors are professional investors who work on behalf of individuals, business, and government. True
Which of the following is true of sole proprietorships and corporations? In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners have limited liability
The key variables in the owner wealth maximization process are ________. cash flows and risk
A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________. $37,500 and -$112,500, respectively
The primary activity of a financial manager is ________. making an investment decision
The board of directors is responsible for managing day-to-day operations and carrying out the policies established by the chief executive officer. False
The conflict between the goals of a firm’s owners and the goals of its non-owner managers is ________. the agency problem
An ethics program is expected to have ________ impact on a firm’s share price. a positive
The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk. True
Which of the following is a duty of a financial manager in a business firm? raising financial resources
As the risk of a stock investment increases, investors’ ________. required rate of return will increase
Which of the following line items in a balance sheet is considered the most for making a financing decision? long-term liabilities
If managers are not owners of their company, then they are ________. agents
The amount earned during the accounting period on each outstanding share of common stock is called ________. Earnings per share
An effective ethics program ________. can enhance a corporation’s value
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Finance Flashcards

Finance – Chapter Three

Four Primary Categories of Ratios 1. Profitability Ratios2. Asset Utilization Ratios3. Liquidity Ratios4. Debt Utilization Ratios
Profitability Ratios (Types) 1. profit margin2. return on assets (investment)3. return on equity
Asset Utilization Ratios (Types) 4. receivable turnover5. average collection period6. inventory turnover7. fixed asset turnover8. total asset turnover
Liquidity Ratios (Types) 9. current ratio10. quick ratio
Debt Utilization Ratios (Types) 11. debt to total assets12. times interest earned13. fixed charged coverage
Profitability Ratios – allows us to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital
Asset Utilization Ratios – measures the speed at which the firm is turning over accounts receivable, inventory, and longer-term assets- measure how many times per year a company sells its inventory or collects all of its accounts receivable- for long-term assets, the utilization ratio tells us how productive the fixed assets are in terms of generating sales
Liquidity Ratios – the primary emphasis moves to the firm’s abilities to pay off short-term obligations as they come due
Debt Utilization Ratios – the overall debt position of the firm is evaluated in light of its asset base and earning power
Profit Margin Ratio net income divided by sales
Return on Assets (Investment) net income divided by total assets
Return on Equity net income divided by stockholder’s equity
Du Pont System of Analysis return on assets (investment) = profit margin x asset turnover
Receivables Turnover sales (credit) divided by receivables
Average Collection Period accounts receivable divided by average daily credit sales
Inventory Turnover sales divided by inventory
Fixed Asset Turnover sales divided by fixed assets
Total Asset Turnover sales divided by total assets
Current Ratio current assets divided by current liabilities
Quick Ratio current assets minus inventory divided by current liabilities
Debt To Total Assets total debt divided by total assets
Times Interest Earned income before interest and taxes divided by interest- indicates the number of times that income before interest and taxes covers the interest obligation
Fixed Charge Coverage income before fixed charges and taxes divided by fixed charges – measures the firms ability to meet all fixed obligations rather than interest payments alone
Trend Analysis an analysis of performance that is made over a number of years in order to ascertain significant patterns
Inflation prices increasing with the passing of time
Replacement Cost – the cost of replacing the existing asset base at current prices as opposed to original cost