LO 4

Question 1

Basic EPS represents

Answer 1

income available to common shareholders per share

Question 2

Diluted EPS is similar to Basic EPS expect that

Answer 2

it takes into account convertible securities outstanding

Question 3

4 types of convertible securities

Answer 3

convertible preferred shares
convertible debt
employee stock options
warrants

Question 4

profit margin indicate

Answer 4

how profitable a company is

Question 5

gross profit margin measures

Answer 5

how good a company is at controlling expenses directly related to generating revenue

Question 6

operating profit margin measures

Answer 6

how profitable a company is while performing its regular day-to-day business that is expected to continue

Question 7

pretax margins strips out

Answer 7

the effects of taxes from net income in order to make an apples-to-apples comparison between companies in different tax juridictions

Question 8

current ratio measures

Answer 8

company’s ability to meet its current liabilities

Question 9

higher current ratios are good but if it is too high

Answer 9

it may indicate inefficient asset allocation

Question 10

current ratio is a good way to

Answer 10

measure a company’s liquidity over time

Question 11

quick ratio measures

Answer 11

the company’s ability to meet short-term obligations with liquid assets

Question 12

cash ratio helps a company

Answer 12

assess their liquidity position if all short term debt became due immediately

Question 13

higher ratios for long term debt to equity indicate

Answer 13

higher risk and leverage since it indicates that the company is funding a bigger portion of their assets with debt

Question 14

5 limitations of balance sheet ratio analysis

Answer 14

1. significant judgment required
2. only measure liquidity/leverage at the END of reporting period
3. current ratio is crude measure of liquidity
4. current ratios can be heavily influenced by management
5. judgement required to determine reasonable range

Question 15

higher cash flow to revenue ratios indicate

Answer 15

the company operates primarily in cash or is better at collecting receivables

Question 16

higher cash return on assets ratios indicate

Answer 16

that a company is generating higher cash returns for debt and equity holders

Question 17

performance ratios give a sense at

Answer 17

how good a firm is at generating cash from their operations

Question 18

higher cash return on equity ratios indicate

Answer 18

that a company is generating higher cash returns for equity shareholders

Question 19

higher cash to income ratios indicate

Answer 19

that a firm extracts more cash from operations per dollar earned from operations

Question 20

solvency ratios measure

Answer 20

a company’s ability to stay in business in the long term

Question 21

liquidity ratios help analysts understand

Answer 21

a company’s ability to meet its short-term obligations

Question 22

coverage ratios help analysts determine

Answer 22

the company’s ability to generate cash in order to pay its obligations

Question 23

debt coverage ratio measures

Answer 23

a firm’s financial risk and leverage based on the cash flow they’re able to generate

Question 24

interest coverage ratio measures

Answer 24

the firm’s ability to meet its interest obligations on its outstanding debt based on the cash flow it generates

Question 25

reinvestment ratio measures

Answer 25

a firm's ability to adequately replenish assets using the cash flow it generates

Question 26

debt payment ratio

Answer 26

measure's a firm's ability to pay down its long term debt with the cash flow it generates

Question 27

dividend payment ratio measures

Answer 27

the firm's ability to pay dividends using its operating cash flows

Question 28

investing and financing ratio measures

Answer 28

the firm's ability to acquire assets, pay debt and distribute earnings to shareholders

Question 29

activity ratios measure

Answer 29

asset utilization and operating efficiency

Question 30

inventory turnover ratio indicates

Answer 30

resources tied up in inventory - a measure of carrying costs

Question 31

higher inventory turnover ratios mean

Answer 31

shorter inventory holding periods and more efficient management relative to peers

Question 32

receivables turnover measures

Answer 32

how well a company converts revenue into cash for companies who offer sales on credit

Question 33

two things that higher receivable turnover ratio indicates

Answer 33

a company is better at collecting cash on their sales or the company is too stringent on their credit policies and are losing sales to competitors as a result

Question 34

payables turnover is a

Answer 34

short-term liquidity metric to measure the rate at which the company pays off its suppliers

Question 35

if inventory purchases are not available for the payables turnover ratio,

Answer 35

COGS can be used

Question 36

working capital turnover ratio measures

Answer 36

how efficiently the company generates income with its working capital

Question 37

easy for management to manipulate working capital turnover by

Answer 37

selling short term debt which decreases working capital and increases the ratio

Question 38

fixed asset turnover ratio measures

Answer 38

how efficiently the company generates revenue from its fixed asset investments

Question 39

profitability ratios measure

Answer 39

how well a company is able to generate profits during a reporting period

Question 40

return on assets measures

Answer 40

how much a company is earning on its total assets

Question 41

valuation ratios give analysts

Answer 41

a quick way to see how much value is embedded in the current price of a share of the company's stock

Question 42

most widely used metric by investors

Answer 42

price to earnings

Question 43

used instead of p/e when the quality of a company's financials are in question

Answer 43

price to cash flow

Question 44

price to earnings is sensitive to

Answer 44

non-recurring earnings and is more easy to manipulate by management

Question 45

price to cash flow is still susceptible to

Answer 45

manipulation since management could simply issue new debt or sell equipment to generate cash and lower this ratio

Question 46

used instead of p/e when a company is in its early development phase and may not have a positive net income

Answer 46

price to sales

Question 47

most difficult valuation ratio to manipulate

Answer 47

price to sales

Question 48

least informative valuation ratio

Answer 48

price to sales since it gives no info about how well the company controls costs

Question 49

price to book value measures

Answer 49

how inflated a company's share price is over the accounting book value of all its assets

Question 50

return on assets ratio measures

Answer 50

whether the company is providing sufficient net income to their shareholders and debtholders

Question 51

return on common equity is always ____ return on equity

Answer 51

greater than or equal to

Question 52

increase in "return on total capital" means

Answer 52

the firm generates more EBIT given for a given level of assets

Question 53

when calculating diluted EPS, interest saved is

Answer 53

multiplied by (1-t)