Business Finance Chapter 4

Which of the following is true about the quick ratio? It is a liquidity ratio.It cannot exceed the current ratio.It is also called the acid-test ratio.It measures the ability of the firm to pay off its short-term obligations without relying on inventory.
If a firm’s ROE is low and management wants to improve it, the increased use of debt could help, most directly through its effect on the… equity multiplier.
All other things being equal, which of the following would increase the current ratio? Cash is acquired through the issuance of additional common stock.
Braswell & Associates has a DSO of 52 days, and its annual sales are $8,600,000. What is its accounts receivable balance? Assume it uses a 365-day year. $1,225,205
A firm has a profit margin of 3.75 percent and an equity multiplier of 2. Its sales are $135 million and it has total assets of $45 million. What is its return on equity (ROE)? 22.50%
Raleigh Racers has $12 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $4 billion in long-term debt, and $7 billion in common equity. It has 900 million shares of common stock outstanding, and its stock price is $34 per share. What is Raleigh’s market-to-book ratio? 4.37
Assume you are given the following relationships for the Rainboldt Corporation: Sales / Total assets 1.4ยด Return on assets (ROA) 3.90% Return on equity (ROE) 5.90%Calculate Rainboldt’s profit margin. 2.79%
Sheffield’s Furniture has $1,262,000 in current assets and $490,000 in current liabilities. Its initial inventory level is $515,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.3? $103,846
The Bellagio Corporation recently reported net income of $3,000,000. It has 600,000 shares of common stock, which currently trades at $40 a share. Bellagio continues to expand and expects that 1 year from now its net income will be $4,500,000. Over the next year it also anticipates issuing an additional 240,000 shares of stock, so that 1 year from now it will have 840,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now? $42.86
Mooney’s Autos has an equity multiplier of 1.3, and its assets are financed with some combination of long-term debt and common equity. What is its debt ratio? 23.1%
The inventory turnover ratio would be most important when analyzing a(n)… grocery store
Why is ratio analysis useful? It is a way of standardizing numbers and can facilitate comparisons between firms.
All other things being equal, which of the following would decrease the current ratio? Current operating expenses are paid.
Over the past year, Graham & Co. has realized an increase in its current ratio and a drop in its total asset turnover ratio. However, the company’s sales, quick ratio, and fixed asset turnover ratio have remained constant. What explains these changes? Inventory levels have increased
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 cash and other current assets to its current liabilities.
Current Ratio This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Quick (Acid Test) Ratio This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities.
Asset Management Ratios A set of ratios that measure how effectively a firm is managing its assets.
Inventory Turnover Ratio This ratio is calculated by dividing sales by inventories.
Days Sales Outstanding (DSO) Rati This ratio is calculated by dividing accounts receivable by average sales per day. It indicates the average length of time the firm must wait after making a sale before it receives cash.
Fixed Assets Turnover Ratio The ratio of sales to net fixed assets.
Total Assets Turnover Ratio This ratio is calculated by dividing sales by total assets.
Debt Management Ratios A set of ratios that measure how effectively a firm manages its debt.
Total Debt to Total Capital The ratio of total debt to total capital.
Times-Interest-Earned (TIE) Ratio The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm’s ability to meet its annual interest payments.
Profitability Ratios A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
Operating Margin This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing operating income by sales.
Profit Margin This ratio measures net income per dollar of sales and is calculated by dividing net income by sales.
Return on Total Assets (ROA) The ratio of net income to total assets.
Return on Common Equity (ROE) The ratio of net income to common equity; measures the rate of return on common stockholders’ investment.
Return on Invested Capital (ROIC) The ratio of after-tax operating income to total invested captial; it measures the total return that the company has provided for its investors
Market Value Ratios Ratios that relate the firm’s stock price to its earnings and the book value per share.
Price/Earnings (P/E) Ratio The ratio of the price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings.
Market/Book (M/B) Ratio The ratio of a stock’s market price to its book value.
DuPont Equation A formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. It shows the relationships among asset management, and profitability ratios.
Benchmarking The process of comparing a particular company with a subset of top competitors in its industry.
Trend Analysis An analysis of a firm’s financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
“Window Dressing” Techniques Techniques employed by firms to make their financial statements look better than they really are.

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