Chapter 4 Flashcards Preview

FIN 3303 > Chapter 4 > Flashcards

Flashcards in Chapter 4 Deck (16):
1

What is the purpose of liquidity ratios?
a. To see if the company can cover all liabilities
b. To see if the company can cover all creditor claims
c. To see if the company can cover short-term liabilities
d. To see if the company can cover long-term liabilities
e. To see how much cash the company has

c. To see if the company can cover short-term liabilities

2

What is the main purpose of profitability ratios?
a. To see if the company produces enough profit
b. To see if the company can produce profit
c. To see how much profit the company is producing
d. To show debtors that the company is making money
e. There is no real purpose to profitability ratios

a. To see if the company produces enough profit

3

How can financial ratios be used to assess performance?
a. Compare to industry average
b. Compare to prior years
c. Compare to management goals
d. All of the above
e. None of the above

d. All of the above

4

What is the current ratio for Barry Computer Company?
a. 2.00
b. 1.98
c. 1.62
d. 2.87
e. 3.00

b. 1.98

CR = CA/CL = $655,000/$330,000 = 1.98x

5

5) What is the total asset turnover ratio for Barry Computer Company? (data on page 130 of textbook)
a. 1.85
b. 2.45
c. 2.00
d. 1.70
e. 1.97

d. 1.70

TAT = Sales/Total Assets = $1,607,500/$947,500 = 1.70x

6

What is the operating profit margin for Barry Computer Company? (data on page 130 of textbook).
a. 0.33 or 33%
b. 0.028 or 2.8%
c. 0.39 or 39%
d. 0.017 or 1.7%
e. 0.0435 or 4.35%

e. 0.0435 or 4.35%

OM = EBIT/Sales = $70,000/$1,607,500 = 0.0435 = 4.35%

7

Analyzing a company’s liquidity ratios ____.
a. Involves analyzing a company’s industry turnover ratio, total debt ratio, and current ratio to evaluate the general health of a company
b. Uses analysis of the current ratio and a market-to-book ratio to ensure that a company has enough cash to cover long-term liabilities
c. Gives an investor a good idea of the worth of a company
d. Re-analyzes all the company’s assets and puts a market value on them, which in turn is used in calculation of the liquidity of the company
e. None of the above

e. None of the above

8

A company with a total debt to total capital ratio of 57%:
a. Has more liabilities than total assets
b. Carries a higher percentage of equity than a company with a total debt ratio of 72%.
c. Carries higher inventory ratios and asset turnover ratios as well.
d. Is cause for trouble in any given industry
e. Can be lowered if a company increases its accounts payable

b. Carries a higher percentage of equity than a company with a total debt ratio of 72%.

9

Which of the following are false statements in regards in financial ratios
a. A company can compare its financial ratios to both prior year ratios and set management goals
b. A Price/Earnings Ratio is a useful tool to determine whether or not a stock is over or undervalued
c. Seasonality of business does not play an important factor in calculating ratios
d. Ratios have a limitation in that measured historical ratios do not always entirely predict future results 100% of the time
e. A company’s financial ratios are often compared to industry averages to gauge its performance amongst its competitors, however, this is done with caution and with a deep understanding of what the ratios measure

c. Seasonality of business does not play an important factor in calculating ratios

10

Company XYZ has current liabilities of $300, total interest-bearing debt of $500, total equity capital of $300, total assets of $1,100 and sales revenues of $5000. When calculating the total debt to total capital ratio which of the following is true considering the industry average is 45%:
a. Company XYZ has a total debt to total capital ratio of 62.5% which indicates they have a higher percentage of debt than the industry average
b. Company XYZ has a total debt to total capital ratio of 16% which indicates they have a higher percentage of debt than the industry average
c. Company XYZ has a total debt to total capital ratio of 16% which indicates they have a lower percentage of debt than the industry average
d. Company XYZ has a total debt to total capital ratio of 80% which indicates they have a lower percentage of debt than the industry average
e. none of the above

a. Company XYZ has a total debt to total capital ratio of 62.5% which indicates they have a higher percentage of debt than the industry average

Total Debt to Total Capital ratio = total interest-bearing debt/(total debt + total equity)
= ($500)/($500 + $300) = 0.625 = 62.5%

11

Liquidity Ratios:

Give an idea of the firm's ability to pay off debt that are maturing within a year.

Does the Company have enough Cash to Cover Short-Term Liabilities?

12

Asset Management Ratios:

Gives an idea of how efficiently the firm is using its assets.

Does the Company have enough or too much in Assets?

13

Debt Management Ratios:

Gives an idea of how the firm has financed its assets as well as the firm's ability to repay its long-term debt.

Does the Company have enough or too much Debt?

14

Profitability Ratios:

Gives an idea of how profitability the firm is operating and utilizing its assets.

Does the Company produce enough Profit?

15

Market Value Ratios:

Gives an idea of what investors think about the firm and its future prospects.

Does the Company produce enough value for the common stockholders?

16

Ratio analysis is used by three main groups:

1. Managers: Use ratios to help analyze, control, and thus improve their firm's operations.
2. Credit Analysts: Use ratios to to help judge a company's ability to repay its debts.
3. Stock Analysts: Who are interest in a company's efficiency, risk, and growth prospects.