Finance 2000 – Chapter 4 – Flashcards
Unlock all answers in this set
Unlock answersquestion
(T/F) The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
answer
False
question
(T/F) Net working capital to total assets and current ratio are both liquidity ratios.
answer
True
question
Other things equal, an increase in average accounts receivable will increase a firm's return on assets.
answer
False
question
If a firm's total debt ratio is greater than .5, then: its current liabilities are quite high. its debt-equity ratio exceeds 1.0. it has too few total assets. it has more long-term debt than equity.
answer
its debt-equity ratio exceeds 1.0.
question
Which of the following actions could improve a firm's current ratio if it is now less than 1.0? Converting marketable securities to cash Paying accounts payable with cash Buying inventory on credit Selling inventory at cost
answer
Buying inventory on credit
question
A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT? $100,000 $300,000 $500,000 $800,000
answer
$500,000
question
Last year's return on equity was 30%. This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings. The firm has no preferred stock. What caused the decrease? Equity decreased by 10%. Equity decreased by 50%. Equity increased by 10%. Equity increased by 50%.
answer
Equity increased by 50%.
question
After-tax operating income for a leveraged firm is defined as: net income + after-tax interest. EBIT × (1 - tax rate). net income + depreciation. profit margin × sales.
answer
net income + after-tax interest.
question
Which one of these changes indicates an improvement in a firm's asset management efficiency? An increase in the amount of assets per dollar of sales An increase in the inventory turnover rate A decrease in the receivables turnover rate An increase in the average days in inventory
answer
An increase in the inventory turnover rate
question
Which one of these statements is correct? Market value added measures the difference between the total market value and the total book value of equity. Net income is also called economic value added. EVA measures the net profit of a firm after deducting the cost of the assets used in the production process. EVA considers the cost of long-term debt financing but excludes the cost of equity financing.
answer
Market value added measures the difference between the total market value and the total book value of equity.
question
market capitalization
answer
Total market value of equity, equal to share price times number of shares outstanding.
question
market value added
answer
The difference between the market value of firm's equity and its book value.
question
market-to-book ratio
answer
Ratio of market value of equity to book value of equity
question
economic value added (EVA)
answer
Income that is measured after deduction of the cost of capital. Also called residual income. EVA = after-tax interest + net income - (cost of capital * total capitalization) ior EVA = after-tax income - (cost of capital * total capitalization)
question
total long term capital
answer
usually called total capitalization, is the sum of long-term debt and shareholders equity
question
EVA vs. accounting income
answer
EVA, or residual income, is a better measure of a company's performance than is accounting income. Accounting income is calculated after deducting all costs except the cost of capital. By contrast, EVA recognizes that companies need to cover their opportunity costs before they add value.
question
Return on Capital (ROC)
answer
After-tax operating income as a percentage of long-term capital. ROC = after-tax operating income/total capitalization
question
Return on Assets (ROA)
answer
After-tax operating income as a percentage of total assets. ROA = after-tax operating income/total assets
question
Return on Equity (ROE)
answer
Net income as a percentage of shareholders' equity. ROE = net income/equity
question
asset turnover ratio
answer
measures how efficiently the business is using its entire asset base asset turnover = sales/total assets
question
inventory turnover
answer
cost of goods sold/inventory at start of year
question
average days in inventory
answer
inventory at start of year/ daily costs of goods sold
question
receivables turnover =
answer
receivables (sales for which you have not been paid) RT = sales/receivables at start of year
question
average collection period
answer
receivables at start of year/average daily sales
question
profit margin
answer
net incomes/ net sales
question
operating profit margin
answer
After-tax operating income as a percentage of sales. OPM = after-tax operating income/ sales
question
Du Pont formula
answer
A breakdown of ROE and ROA into component ratios. ROA = asset turnover * operating profit margin
question
long-term debt ratio
answer
long term debt/ (long term debt + equity)
question
long term debt-equity ratio
answer
= long-term debt/equity
question
total debt ratio
answer
total liabilities/total assets
question
times interest earned ratio
answer
EBIT/interest payments
question
cash coverage ratio
answer
(EBIT + depreciation)/interest payments
question
Net working Capital to Total Assets Ratio
answer
NWC/TA..obvious
question
current ratio
answer
current assets/current liabilities
question
quick (Acid-Test) Ratio
answer
(cash + marketable securities + receivables) / current liabilities
question
cash ratio
answer
(cash + marketable securities)/ current liabilities
