Chapter 3, Intermediate Finance – Flashcards
Unlock all answers in this set
Unlock answersquestion
A common-size balance sheet will express accounts receivable as a percentage of:
answer
Total Assets
question
Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as:
answer
Liquidity measures
question
The quick ratio is calculated as:
answer
Current assets minus inventory, divided by current liabilities
question
Which one of these measures a firm's long-run ability to meet its obligations
answer
Equity multiplier
question
Which one of these is the formula for computing enterprise value?
answer
Market capitalization + Market value of interest bearing debt - Cash
question
Which one of these is calculated as earnings before interest and taxes plus depreciation and amortization, divided by interest expense?
answer
Cash coverage ratio
question
Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.
answer
Utilization
question
Which ratio measures the number of times a firm lends money to customers, collects that money, and relends it within a year?
answer
Receivables turnover
question
Which ratio calculates the amount of sales generated by each $1 invested in assets?
answer
Total asset turnover
question
Which ratio computes the amount of net income generated per each $1 of sales
answer
Profit margin
question
Which ratio identifies the amount shareholders are willing to pay for each $1 per share of earnings a firm generates?
answer
Price-earnings ratio
question
Firms with high enterprise value multiples are most apt to have
answer
High growth opportunities
question
What is the purpose of the enterprise value measure
answer
To estimate the cash required to purchase all of the outstanding stock of a firm as well as pay off the firm's interest bearing debt
question
Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?
answer
Dupont identity
question
Which one of these combinations will provide sufficient information to determine the sustainable growth rate of a firm?
answer
Profit Margin, dividend payout ratio, debt-equity ratio, and total asset turnover
question
The sustainable rate of growth can be increased by
answer
Increasing the profit margin
question
The return on equity can be calculated as
answer
Profit margin x 1/Capitol intensity ratio x Equity multiplier.
question
On a common-size income statement, depreciation will be:
answer
expressed as a percentage of sales
question
Which one of the following statements is correct concerning ratio analysis
answer
A single ratio is often computed differently by different individuals
question
Which of the following are liquidity ratios?
answer
II and III only Current ratio Quick Ratio
question
An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
answer
Inventory
question
A supplier, who requires payment within ten days, should be most concerned about which one of its customer's ratios?
answer
Cash ratios
question
A firm has a total debt ratio of .53. This means the firm has $.53 in debt for every:
answer
$.47 in equity
question
Which cash coverage ratio would a lender prefer its borrower have?
answer
1.5
question
From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?
answer
Cash coverage ratio
question
The higher a firm's inventory turnover, the:
answer
faster the firm sells its inventory
question
Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?
answer
It take the firm 36.5 days to collect payment for a sale
question
A total asset turnover measure of 1.03 means that a firm has $1.03 in:
answer
sales for every $1 in total assets
question
If a firm produces a 12 percent return on assets and also a 12 percent return on equity, then the firm:
answer
has no debt of any kind
question
If Textile Cloth shareholders want to know how much net profit Textile Cloth is making on a percentage basis on their investment in that firm, the shareholders should refer to the
answer
return on equity
question
Assume JustDoIt Co. increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the
answer
return on equity will increase
question
The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:
answer
Moe's will have a lower profit margin
question
Last year, Bennett's had a price-earnings ratio of 10.2. This year, the price earnings ratio is 10.4. Based on this information, it can be stated with absolute certainty that:
answer
either the price per share, the earnings per share, or both, changed
question
Yesterday, Dai stock sold for $28 a share. Today, the overall market fell and Dai stock is now selling for $22 a share. Which of these ratios for Dai will be affected by this market reaction? Assume all else is held constant.
answer
Enterprise value multiple and price-earnings ratio
question
If a firm decreases its operating costs, all else constant, then:
answer
both the return on assets and the return on equity increase
question
Ratio analysis works best when evaluating the financial statements of two firms:
answer
of differing sizes in the same industry
question
Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
answer
I, II, III, and IV
question
Assume a firm is operating at full capacity. Which one of these accounts is least apt to vary directly with sales?
answer
Long-term debt
question
For a dividend-paying firm, how is the projected addition to retained earnings calculated using the percentage of sales approach?
answer
Net income x (10 dividend payout ratio)
question
If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth, and shows positive net income, then the pro forma statement must reflect:
answer
a constant debt-equity ratio and an increase in retained earnings.
question
Financial planning, when properly executed
answer
helps ensure the adequate financing is in place to support the desired level of growth
question
The internal rate of growth is based on the assumption that
answer
no external funding of any type is obtained.
question
Juno's has sales of $389,000, a tax rate of 34 percent, a dividend payout ratio of 45 percent, and a profit margin of 6 percent. What is the addition to retained earnings?
answer
12,837.00
question
Charlotte's has current sales of $122,000, current liabilities of $16,400, and net working capital of $2,100. The projected sales for next year are $134,000. All net working capital accounts change directly with sales. What is the projected value of current assets for next year?
answer
20,319.67
question
A firm has total assets of $162,000, long-term debt of $46,000, stockholders' equity of $95,000, and current liabilities of $21,000. The dividend payout ratio is 60 percent and the profit margin is 8 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $150,000 are projected to increase by 10 percent?
answer
8,820
question
A firm has total assets of $262,000, long-term debt of $105,000, stockholders' equity of $111,000, and current liabilities of $46,000. The retention ratio is 60 percent and the profit margin is 6 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $275,000 are projected to increase by 10 percent?
answer
10,710
question
Tree Top Furniture has current sales of $311,000 and fixed assets of $198,000. The firm is currently operating at 83 percent of capacity. What is the maximum percentage increase the firm can have in sales without investing in additional fixed assets?
answer
20.48
question
Jensen's Boats has sales of $387,000, cost of goods sold of $204,000, depreciation of $32,000, and selling and general costs of $21,000. The firm has a loan balance of $87,400 with an interest rate of 7 percent. What is the value of the interest bearing debt to EBITDA measure?
answer
.54
question
Parker's Meats has total assets of $411,900, a price-earnings ratio of 8.4, a debt-equity ratio of .65, and earnings per share of $1.22. What is the market to book ratio if there are 45,000 shares of stock outstanding?
answer
1.85
question
A firm has sales of $142,600, net income of $22,800, net fixed assets of $94,300, and current assets of $42,600, of which $31,400 is inventory. What is the common-size statement value of inventory?
answer
22.94
question
A firm has sales of $2,400, net income of $125, total assets of $1,100, and total equity of $750. Interest expense is $200. What is the common-size statement value of the interest expense
answer
8.33
question
Jessica's Boutique has cash of $460, accounts receivable of $630, accounts payable of $1,200, and inventory of $1,450. What is the value of the quick ratio?
answer
.91
question
A firm has a debt-equity ratio of .40. What is the total debt ratio
answer
.29
question
A firm has total debt of $1,500 and a debt-equity ratio of .40. What is the value of the total assets?
answer
5,250
question
A firm has sales of $83,600, costs of $52,800, interest paid of $1,600, and depreciation of $11,400. The tax rate is 34 percent. What is the value of the cash coverage ratio?
answer
19.25
question
Vaun's Pet Store paid $16,950 in interest and $21,300 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $84,200. What is the value of the cash coverage ratio?
answer
EBIT = 3.8 x $16,950 = $64,410 Cash coverage ratio = ($64,410 + 84,200)/$ 16,950 = Answer 8.77
question
Les' Motors has sales of $482,800, cost of goods sold of $297,400, inventory of $169,600, and accounts receivable of $52,900. How many days, on average, does it take the firm to sell its inventory?
answer
Inventory turnover = $297,400/$169,600 = 1.75 Days in inventory = 365/1.75 = Answer 208.15 days
question
Burnside's has accounts receivable of $33,700, inventory of $54,200, sales of $364,200, and cost of goods sold of $193,400. How long does it take the firm to sell its inventory and collect payment on the sale?
answer
Inventory turnover = $193,400/$54,200 = 3.57 Days in inventory = 365/3.57 = 102.29 days Accounts receivable turnover = $364,200/$33,700 = 10.81 Days' sales in receivables = 365/10.81 = 33.77 days Total days in inventory and receivables = 102.29 + 33.77 = Answer 136.06 days
question
Western Wear has net working capital of $3,500, net fixed assets of $42,000, sales of $69,000, and current liabilities of $9,800. From each $1 in total assets, the firm generates sales of:
answer
Total asset turnover = $69,000/($3,500 + 9,800 + 42,000) = 1.25 times Every $1 in total assets generates Answer $1.25 in sales.
question
Rosario's has sales of $114,500, total debt of $46,300, total equity of $68,400, and a profit margin of 5 percent. What is the return on assets?
answer
Return on assets = (.05 × $114,500)/($46,300 + 68,400) = Answer .0499, or 4.99%
question
Supra's has sales of $893,000, total assets of $932,500, a profit margin of 6.5 percent, and a total debt ratio of 40 percent. What is the return on equity?
answer
Return on equity = (.065 × $893,000)/[$932,500 × (1 - .40)] = Answer .1038, or 10.37%
question
The Uptowner has $956,400 in sales. The profit margin is 4.75 percent. There are 25,000 shares of stock outstanding with a market price per share of $32.40. What is the price-earnings ratio?
answer
Earnings per share = (.0475 × $956,400)/25,000 = $1.82 Price-earnings ratio = $32.40/$1.82 = Answer 17.83
question
Patti's has net income of $43,700, a price-earnings ratio of 15.7, and earnings per share of $1.39. How many shares of stock are outstanding?
answer
Number of shares = $43,700/$1.39 = 31,439 shares
question
A firm has 35,000 shares of stock outstanding, sales of $767,000, net income of $84,900, a price-earnings ratio of 16.4, and a book value per share of $9.60. What is the market-to-book ratio?
answer
Earnings per share = $84,900/35,000 = $2.43 Price per share = $2.43 × 16.4 = $39.78 Market-to-book ratio = $39.78/$9.60 = Answer 4.14 times
question
A firm has 5,000 shares of stock outstanding with a market value of $23.60 a share, $74,800 of long-term debt with an interest rate of 7.5 percent, cash on hand of $6,400, sales of $198,000, costs of $107,200, and depreciation of $13,400. The tax rate is 35 percent. What is the enterprise value multiple?
answer
Enterprise value multiple = [(5,000 × $23.60) + $74,800 - 6,400]/($198,000 - 107,200) = Answer 2.05 times
question
Nelson Farms has 12,500 shares of stock outstanding with a market value of $11.20 a share and $68,000 of debt bearing an interest rate of 6.7 percent. Current assets consist of $2,800 in cash, $16,400 in accounts receivable, and $31,200 in inventory. Accounts payable are $27,300. What is the firm's enterprise value?
answer
Enterprise value = (12,500 × $11.20) + $68,000 - 2,800 = Answer $205,200
question
Southern Markets has a profit margin of 4.8 percent, a return on assets of 11.2 percent, and a debt-equity ratio of.55. What is the return on equity?
answer
Return on equity = .112 × (1 + .055) = Answer .1736, or 17.36 percent
question
Cellar Wines has a debt-equity ratio of 42 percent, sales of $849,000, net income of $76,800, and total debt of $349,000. What is the return on equity?
answer
Return on equity = $76,800/($349,000/.42) = .0924 = 9.24%
question
Marcel's has a debt-equity ratio of 60 percent, a capital intensity ratio of .98, and a profit margin of 4.2 percent. What is the return on equity?
answer
ROE = .042 × (1/.98) × (1 + .60) = Answer .0686, or 6.86%
