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Fin 120 ch4

The TBI Company has a number of days of inventory of 50. Therefore, the TBI Company’s inventory turnover is closest to
Cost of goods sold/Inventory = Inventory/(CoGS/365) = 365

Inventory turnover X Number of days of inventory = 365

Inventory turnover × 50 = 365, and solving for Inventory turnover provides a turnover of 7.3 times.

DuPont analysis involves breaking return-on-assets ratios into their
profit margin and turnover components.
If a company’s net profit margin is -5 percent, its total asset turnover is 1.5 times, and its equity multiplier ratio is 1.2 times, its return on equity is closest to
ROE = Net income/Average total equity =
Net income/Revenues X
Revenues/Average total assets X
Average total assets/Average total equity

Return on equity = -5% × 1.5 × 1.2 = -9.0%

Which of the following issues are stockholders primarily concerned about? (listed correct answers)
-The value of their stock.

-How much cash they can receive via dividends and/or capital appreciation.

-How profitable the firm is.

Which of the following is not a primary concern of a firm’s creditors? (Whether the firm is generating enough cash to pay dividends?)
-Whether and when they will be repaid the money that they have loaned the firm?

-Whether and when they will receive their entitled interest payment?

-Whether the firm is generating enough cash to pay its day-to-day bills?

To create a common size balance sheet, we divide each of the asset, liability, and equity account items by
total assets.
The most useful way to prepare a common size income statement is to express each account item as a percentage of
net sales.
Which of the following aspects about a company’s health does the current ratio measure?
Short-term solvency
Anyone analyzing a firm’s financial statements should
-use audited financial statements only.

-do a trend analysis.

-perform a benchmark analysis.

All but one of the following is true of common-size balance sheets.
Each asset and liability item on the balance sheet is standardized by dividing it by sales.
All but one of the following is true of common-size income statements.

(Each income statement item is standardized by dividing it by total assets.)

-Common-size financial statement analysis is a specialized application of ratio analysis.

-Income statement accounts are represented as percentages of sales.

-Each income statement item is standardized by dividing it by sales.

Which of the following is NOT true of liquidity ratios? (For manufacturing firms, quick ratios will tend to be much larger than current ratios.)
-They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble.

-The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.

-There are two commonly used ratios to measure liquidity—current ratio and quick ratio.

All but one of the following is true about quick ratios. (Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.)
-Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory.

-The quick ratio is calculated by dividing the most liquid of current assets by current liabilities.

-Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.

Which one of the following does NOT change a firm’s current ratio? (The firm collects on its accounts receivables.)
-The firm purchases inventory by taking a short-term loan.

-The firm pays down its accounts payables.

-None of the above.

All else being equal, which one of the following will decrease a firm’s current ratio?
An increase in accounts payable.
Which one of the following statements is NOT true?
The more days that it takes the firm to collect on its receivables, the more efficient the firm is.
Which one of the following statements is NOT correct? (A leveraged firm is less risky than a firm that is not leveraged.)
-A leveraged firm is more risky than a firm that is not leveraged.

-A firm that uses debt magnifies the return to its shareholders.

-All of the above statements are correct.

For a firm that has no debt in its capital structure,
ROE = ROA.
Which one of the following statements is NOT correct? (All of the above are correct.)
The DuPont system is based on two equations that relate a firm’s ROA and ROE.

-The DuPont system is a set of related ratios that links the balance sheet and the income statement.

-Both management and shareholders can use this tool to understand the factors that drive a firm’s ROE.

The DuPont equation shows that a firm’s ROE is determined by three factors:
net profit margin, total asset turnover, and the equity multiplier.
Liquidity ratio: Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of 378,454. What is the quick ratio?
Current assets = $623,122
Current liabilities = $378,454
Inventory = $241,990

Quick ratio = Current assets – Inventory / Current liabilities =

($623,122 – $241,990) / $378,454 = 1.01

Liquidity ratio: Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm’s current ratio?
Current assets = $73,913 + $451,000 +$334,227 = $859,140
Current liabilities = $469,553

Current ratio = Current assets / Current liabilities
$859,140/$469,553 = 1.83

Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of 197,333. What is the firm’s quick ratio?
Current ratio = 1.92
Current liabilities = $272,934
Inventory = $197,333

Current ratio = Current assets / Current liabilities
1.92 = Current assets / Current liabilities
Current assets = 1.92 X $272,934 = %524,033

Quick ratio = (Current assets – Inventory) / Current liabilities =
($524,033 – $197,333) / $272,934 = 1.20

Efficiency ratio: If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover?
Accounts receivables = $654,803
Net sales = $1,932,349

A/R turnover = Net sales / Accounts receivables

=$1,932,349/$654,803=2.95

Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables?
Accounts receivables turnover = 3.9x
Net sales = $3,436,812

A/R turnover = Net sales / Account receivables

3.9x= $3,436,812 / Accounts receivables

Accounts receivables= $3,436,812 / 3.9 = $881,234

Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm’s days’s sales in inventory?
Day’s sales in inventory = 356/5.6 = 65.2 days
Efficiency ratio: Jet, Inc., has net sales of $712,478 and accounts receivables of $167,435. What are the firm’s accounts receivables turnover and days’s sales outstanding?
Net sales = $712,478
Accounts receivables = $167,435

A/R turnover = Net sales / Accounts receivables
=$712,478/$137,435 = 4.26 times

DSO= 365 / (Net sales / Accounts receivable turnoever)
=365/4.26 = $85.7 days

Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm’s cost of goods sold?
Gross profit margin = (Sales – CofGS) / Sales
0.673= ($6,344,210 – CoGS) / $6,344,210

CofGS = $6,344,210 – (0.673*$6,344,210)
=$2,074,557

Leverage ratio: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm’s equity multiplier and debt-to-equity ratio?
Debt ratio = $1,233,837 / $2,178,990 = 0.57

Equity multiplier = total assets/equity
= 1/(equity/total assets)
= 1/(1-debt/total asets)
= 1/(1-0.57) = 2.33

Equity multiplier = 1 + (debt to equity)
debt to equity ratio = equity multiplier -1
= 2.33-1=1.33

Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company’s share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm’s price-earnings ratio.
Net income = $812,425
Share price = $13.45
EPS = $812,425 / 312, 490 = $2.60

Price – earnings ratio = $13.45/$2.60 = 5.17 time

Market Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm’s share price?
Net income = $1,276,351
Share outstanding= 420,000
EPS = $1,276,351 / 420,000 = $3.04
P-E ratio = 11.2 times

Price – earnings ratio = Price per share/EPS
11.2 = Price per share/$3.04
Price per share = 11.2 x $3.04 = #34.05

The quick ratio is a better indicator of a company’s liquidity compared to the current ratio due to the impact of:
inventory.
Which of the following indicates how quickly a firm’s credit accounts are being collected?
accounts receivable turnover
Which of the following is a coverage ratio?
times interest earned ratio
Which of the following is an indicator of how efficient management is in using assets to generate sales?
total asset turnover
A debt ratio of 0.9 means:
the firm has $0.90 of total debt for every $1.00 of total assets.
A common-size balance sheet illustrates the relationship between:
asset accounts and total assets.

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