Corporate Finance MGMT 332 Chapter 3

Which of the following are traditional financial ratio categories? Financial leverage ratiosProfitability ratiosturnover ratios
How is the price-earnings (PE) ratio computed? market price per share/earnings per share
Whenever _____ information is available, it should be used instead of accounting data. market
Which of the following is (are) true of financial ratios? Are developed from a firm’s financial informationAre used for comparison purposes pg 56
The cash coverage ratio adds _____ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations. depreciationpg 59
Common-size statements are best used for comparing: Firms of different sizescompetitorsyear-to-year for your firm
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables? The total asset turnover will increasepg 72
Which of the following would help a company take action to improve its ratios? Comparing to its own historical ratiosComparing to major competitorsComparing to peer companiesComparing to aspirant companies
What does it mean when a firm has a days’ sales in receivables of 45? The firm collects its credit sales in 45 days on average.pg 60
Which of the following items are used to compute the current ratio? CashAccounts payable
_____ _____ are the prime source of information about a firm’s financial health. Financial statements
Time-trend analysis is an example of Management by exceptionpg74
Alpha Co. has interest expense of $1.2 million, total assets of $84 million, sales o $76 million, long-term debt of $16.4 million, and net income of $12.1 million. How will interest expense be recorded in the common-size income statement? $1.2m/$76m = 1.58%
AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. The firm’s inventory turnover is _____ . Inventory Turnover = COGS/Inventory = 350/87.5 = 4.0
Which of the following create problems with financial statement analysis? The firm or its competitors are conglomerates.The firm or its competitors are global companies.The firm or its competitors operate under different regulatory environments.
What does a Time Interest Earned (TIE) ratio 3.5 times mean? The company’s interest obligations are covered 3.5 times by its EBIT
The information needed to compute the profit margin can be found on the ____ . Income statement
Which of the following is the correct representation of the total debt ratio? (total assets – total equity) / (total assets)
A common-size balance sheet expresses accounts as a percentage of ____ . total assets
Based on the DuPont Identity, an increase in sales, all else held equal, _____ ROE. May not changeMay increase or decreaseAn increase in sales (all else equal) will decrease net profit margin and increase total asset turnover.
Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company’s current liabilities total $5 million. The quick ratio is ____ . Quick ratio = ($7m – $4m) / $5m = 0.60pg 51
Based on the sustainable growth rate, which of the following factors affect a firm’s ability to sustain growth? Profit marginFinancial policyDividend policypg 72
AD Corporation had net income of $300,000 and paid out $125,000 in cash dividends to stockholders. The firm’s retention ratio is _____ %. (Round the percent the nearest whole number.) Retention ratio = Addition to retained earnings / net income = (Net income – dividends) / Net income = ($300,000 – $125,000) / $300,000 = 0.58, or 58%
The cash ratio is found by dividing cash by: current liabilitiespg65
Return on equity (ROE) is a measure of ____ . profitability
AD Corporation has a return on equity of 20% on total equity of $800,000. AD generated $1.6m in sales on $2.7m in assets. A DuPont decomposition of ROE shows the 20% return on equity is from a _____ total asset turnover ratio. 0.59pg 51
Which one of the following does NOT affect ROE according to the DuPont identity? Investor sentmentpg 67
Alpha Star’s net income is $300 on $2,000 of sales. The company has $5,000 in assets nd equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio? 125/300 = 41.67%pg 67
AD Corporation’s return on assets is 14% and the firm retains 40% of all its earnings. AD’s internal growth rate is _____ %. 5.93pg 67
Which of the following is true about the sustainable growth rate? It is the max rate of growth a firm can maintain without increasing its financial leveragepg 67
Which one of the following is the correct equation for computing return on assets (ROA)? Net income/Total assetspg 66
How is the market-to-book ratio measured? Market value per share/book value per sharepg 51
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will _____ . increasepg 51
The profit margin is equal to net income divided by _____ . salespg 51
Return on assets (ROA) is a measure of ____ . profitailitypg 51
AC motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $49,300. What is the return on equity. $51,750 ($523,400 – 267,000) = 20.18%pg 51
BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2m and equity of $1.5m. What is the PE ratio if the stock is currently selling at $18 per share? $18/($2,700/1,800) = 12 timespg 1
If a company has had negative earnings for several periods they might choose to use a _____ . Price sales ratiopg 51
Nestor’s has net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity? 315,000/1.98m = 15.91%pg 51
Vera’s has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio? price per share/earnings per share30/3 = 10 pg 51
A firm with a 26 percent return on equity earned _____ cents in profit for every one dollar in shareholders’ equity. 26pg 51
Cal’s Market has return on equity (ROE) of 15 percent. What does this mean? Cal’s gen’d $.15 in profit for every $1 of market value of equity. pg 51
How is inventory turnover ratio computed? cost of goods sold/inventory
Rock Construction has current assets of $45m, total liabilities and equity of $67m, and sales of $59m. How would current assets be expressed on a common-size balance sheet? Assets = liabilities + equity45mA/67mE = 67%
True or False: A way to establish a benchmark for ratio analysis is to identify a peer group. True
What does it mean when a company reports ROA of 12 percent? The company gen’s $12 in net income for every $100 invested in assets.
Current assets on the common-size balance sheet over the pas three yeas have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its ______ . liquidity
AD Corporation has net income of $425,000 and total sales of $2.5 million. The firm’s profit margin is _____ % . Profit Margin = $425,000/$2,500,000 = 17%
Long-term solvency ratios are also known as: financial leverage ratiospg 52
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company’s inventory takes _____ to sell. a long-time
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio? non-cash expenses
What will happen to the current ratio if current assets increase, while everything else remains unchanged? it will increase
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company’s inventory takes _____ to sell a long time
Assume current assets = 11,300; long-term liabilities = 45,000; and total debt – 54,800. What is the current ratio? 11,300/(54,800 – 45,000) = 1.15
Which one of the following best explains why financial managers use a common-size balance sheet? To track changes in a firm’s capital structure.
Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover? 2.90
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be: Less than 1
BC Corporation has net income of $176,000, sales of $1,982,000 and total assets of $2.24m. What is the return on assets? $176,000/$2.24m = 7.86%
A firm with a profit margin of 10% generates _____ in net income for every dollar in sales. 10 cents
BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratios? $54/($584,000/35,000) = 3.24 times
BK trucking has total equity of $25,380 and 1,500 shares outstanding. Its stock is currently selling at $38 per share. what is the market-to-book ratio? $38/($25,380/1,500) = 2.25

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