Formulas Not Provided During Exam

Question 1

Accounts Receivable Turnover Ratio (3)

Answer 1

credit sales / accounts receivable

Question 2

Days Sales Outstanding (3)

Answer 2

365 / accounts receivable turnover ratio

Question 3

Asset Turnover Ratio (3)

Answer 3

sales / total assets

Question 4

Inventory Turnover Ratio (3)

Answer 4

cost of goods sold / inventory

Question 5

Working Capital (3)

Answer 5

current assets - current liabilities

Question 6

Current Ratio (3)

Answer 6

current assets / current liabilities

Question 7

Acid-Test Ratio (or Quick Ratio) (3)

Answer 7

(cash + marketable securities + accounts receivable) / current liabilities

Question 8

Debt-to-Equity Ratio (3)

Answer 8

long-term debt / shareholders’ equity

Question 9

Debt-to-Assets Ratio (3)

Answer 9

total liabilities / total assets

Question 10

Net Profit Margin (3)

Answer 10

net income / sales

Question 11

Return on Assets (ROA) (3)

Answer 11

net income / total assets

Question 12

Return on Equity (ROE) (3)

Answer 12

net income / shareholders’ equity

Question 13

Equity Multiplier (3)

Answer 13

total assets / shareholders’ equity

Question 14

DuPont Identity (3)

Answer 14

net profit margin x asset turnover x equity multiplier

Question 15

Premium-to-Surplus Ratio (5)

Answer 15

net written premium / policyholders surplus

Question 16

Reserves-to-Surplus Ratio (5)

Answer 16

(unearned premium reserve + loss and LAE reserves) / policyholders surplus

Question 17

Liquidity Ratio (5)

Answer 17

(cash + invested assets) /

(unearned premium reserve + loss and LAE reserves

Question 18

Loss Ratio (5)

Answer 18

(incurred losses + LAE) / earned premiums

Question 19

Expense Ratio (5)

Answer 19

underwriting expenses / written premium

Question 20

Combined Ratio (5)

Answer 20

loss ration + expense ratio

Question 21

Investment Income Ratio (5)

Answer 21

net investment income / earned premiums

Question 22

Operating Ratio (5)

Answer 22

combined ration - investment income ratio

Question 23

Investment Yield Ratio (5)

Answer 23

net investment gain (loss) / (total cash + invested assets)

Question 24

Return on Policyholders’ Surplus (5)

Answer 24

net income / policyholders’ surplus

Question 25

Annual Rate of Return for a Bond (7)

Answer 25

(interest + capital gain) /

bond price at beginning of the year

Question 26

Annual Rate of Return for a Stock (7)

Answer 26

(dividend + capital gain) /

share price at beginning of the year

Question 27

Insurance Leverage (10)

Answer 27

reserves / policyholder’ surplus =
(Premiums written / policyholder’ surplus) x
(reserves / premiums written)