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This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
Net profit margin
Times Interest Earned = EBIT / Interest Expense


2. Given $2 -044000 in total assets - $1 -351000 in total stockholders' equity - and debt-to-total-asset ratio of 33.90% - calculate the debt to equity ratio.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Times Interest Earned = EBIT / Interest Expense
Inventory Turnover = 5000000/3000000 = 1.67
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other


3. Given $20 million in total assets - $14 million in total stockholders' equity - and a debt to total asset ratio of 30 percent for Folson Corporation - what will be the debt to equity ratio?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
M/B = Market Price per Share / Book Value per Share
Debt to Equity = Total Debt / Equity


4. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations
Market Value Added (MVA) is the market value of the firm - debt plus equity - minus the total amount of capital invested in the firm and is similar to the market to book (M/B) ratio. MVA - however focuses on total market value and total invested capi
EVA = EBIT(1-TR) - (IC x Ka) - Where: EBIT = earnings before interest and taxes - TR = the effective or average income tax rate - IC = invested capital - Ka = investors' required rate of return on their investment.


5. Umbrella Corporation has total assets of $5 million and an asset turnover ratio of 4. If net income is $2 million - What is the value of the net profit margin?
Trend analysis uses ratios to compare a firm's past and present performance.
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
Sales
Actually - an analyst would not use the Modified Du Pont equation to calculate ROE for precisely the reason stated above. What an analyst would use the Modified Du Pont equation for is to help analyze the factors that contribute to a firm's ROE. In o


6. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Average collection period
One ratio to a related ratio - The firm's performance to management's goals - The firm's past and present performance - The firm's performance to that of similar firms.
Debt to Equity = Total Debt / Equity


7. What is a mixed ratio?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current assets - inventory = $50000 - (.5
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


8. Why are M/B and MVA highly correlated?
Current Ratio = Current Assets / Current Liabilities
Both focus on the value of the stock: MVA focuses on total market value while M/B focuses on per share stock price and both focus on total invested capital.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Quick Ratio = Current Assets Less Inventory / Current Liabilities


9. How do you calculate the debt to total assets? (This is a Debt Ratio)
The Du Pont System of ratio analysis examines the relationships between ratios.
Debt to Total Assets = Total Debt / Total Assets
Asset Activity Ratios measure how efficiently a firm uses its assets.
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi


10. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Going concern value
Quick Ratio = Current Assets Less Inventory / Current Liabilities
The Du Pont System of ratio analysis examines the relationships between ratios.
Return on equity


11. How do you calculate gross profit margin? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total Assets
Gross Profit Margin = Gross Profit / Sales
Times Interest Earned = EBIT / Interest Expense
Cross-sectional analysis


12. Why do analysts calculate financial ratios?
Current Ratio = Current Assets / Current Liabilities
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi
Trend analysis
Profitability ratios measure how much company revenue is eaten up by expenses - how much a company earns relative to sales generated - and the amount earned relative to the value of the firm's assets and equity.


13. What do liquidity ratios measure?
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Quick Ratio = Current Assets Less Inventory / Current Liabilities


14. What are ratios used to compare?

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15. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
M/B = Market Price per Share / Book Value per Share
Actually - an analyst would not use the Modified Du Pont equation to calculate ROE for precisely the reason stated above. What an analyst would use the Modified Du Pont equation for is to help analyze the factors that contribute to a firm's ROE. In o
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
Return on equity


16. Explain trend analysis.

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17. What is meant by the leverage effect?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Inventory Turnover = Sales / Inventory
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it


18. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total asset turnover Ratio
Return on equity


19. The ___________________compares all the current assets of the firm to all the company's current liabilities.
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
Debt to Equity = Total Debt / Equity
Current ratio
Inventory Turnover = Sales / Inventory


20. How do you calculate the current ratio? (This is a Liquidity Ratio)
Debt to Total Assets = Total Debt / Total Assets
Current Ratio = Current Assets / Current Liabilities
Trend analysis helps financial managers and analysts see whether a company's current financial situation is improving or deteriorating. - Cross-sectional analysis - or industry comparison - allows analysts to put the value of a firm's ratios in the c
Trend analysis


21. The ___________________________measures how efficiently a firm utilizes its assets.
Actually - an analyst would not use the Modified Du Pont equation to calculate ROE for precisely the reason stated above. What an analyst would use the Modified Du Pont equation for is to help analyze the factors that contribute to a firm's ROE. In o
Total asset turnover Ratio
Average collection period
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


22. Umbrella Company has total sales of $4 million. One-fourth of these are credit sales. The amount of accounts receivable is $100000. What is the average collection period for the company? Use a 365-day year.
Credit sales = $4000000
Trend analysis helps financial managers and analysts see whether a company's current financial situation is improving or deteriorating. - Cross-sectional analysis - or industry comparison - allows analysts to put the value of a firm's ratios in the c
Both focus on the value of the stock: MVA focuses on total market value while M/B focuses on per share stock price and both focus on total invested capital.
Market to book value ratio


23. Why are trend analysis and industry comparison important to financial ratio analysis?

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24. ________ uses computed ratio values for several time periods and compares them.
Current assets - inventory = $50000 - (.5
Trend analysis
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
Credit sales = $4000000


25. One way to judge whether a firm's ratio is too high or too low is to compare it to the ratios of other firms in the industry. This is sometimes called ____________.
Going concern value
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Cross-sectional analysis
Sales


26. Jumbo Corp has a quick ratio value of 1.5. It has total current assets of $100000 and total current liabilities of $25000. If sales are $200000 - What is the value of the inventory turnover ratio?
($100000 current assets - inventory)
Total asset turnover Ratio
Debt
Going concern value


27. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Market to book value ratio
Average collection period
Trend analysis
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.


28. Explain the difference between the current and the quick ratio.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Actually - an analyst would not use the Modified Du Pont equation to calculate ROE for precisely the reason stated above. What an analyst would use the Modified Du Pont equation for is to help analyze the factors that contribute to a firm's ROE. In o
Total asset turnover Ratio
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.


29. Malpaso Company has current assets of $50000. Total assets are $200000; and longterm liabilities and common stock collectively total $180000. What is the value of the current ratio?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Market to book value ratio
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
P/E = Market Price per Share / Earnings per Share


30. Explain how financial ratio analysis helps financial managers assess the health of a company.
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it
Average collection period
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Return on equity


31. What does economic value added (EVA) measure?

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32. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Profitability ratios measure how much company revenue is eaten up by expenses - how much a company earns relative to sales generated - and the amount earned relative to the value of the firm's assets and equity.
($100000 current assets - inventory)
Debt to equity ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


33. The ___________________________tells us how efficiently the firm converts inventory to sales.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Inventory turnover ratio
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel
Industry analysis


34. Why is the EVA an important new tool in financial analysis?
Debt to Total Assets = Total Debt / Total Assets
Current assets - inventory = $50000 - (.5
Average collection period
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other


35. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Industry analysis
One ratio to a related ratio - The firm's performance to management's goals - The firm's past and present performance - The firm's performance to that of similar firms.


36. What do profitability ratios measure?

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37. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Current assets - inventory = $50000 - (.5
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
A financial ratio is a number that expresses the value of one financial variable relative to another. Put more simply - a financial ratio is the result you get when you divide one financial number by another. Calculating an individual ratio is simple
Inventory Turnover = 5000000/3000000 = 1.67


38. How do you calculate EVA?

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39. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
P/E = Market Price per Share / Earnings per Share
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Average collection period


40. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
($100000 current assets - inventory)
Gross Profit Margin = Gross Profit / Sales
Current ratio
Total Asset Turnover = Sales / Total Assets


41. If total assets are $20 million - noncurrent assets are $2 million - inventory is $3 million - and sales are $5 million for Toronto Brewing Company - what is the inventory turnover ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Inventory Turnover = 5000000/3000000 = 1.67
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm
Average collection period


42. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Net profit margin
Equity multiplier
Market to book value ratio


43. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Going concern value
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
P/E = Market Price per Share / Earnings per Share
Return on Assets = Earnings Available to Common Stockholders / Total Assets


44. What is market value added (MVA)?
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
Market Value Added (MVA) is the market value of the firm - debt plus equity - minus the total amount of capital invested in the firm and is similar to the market to book (M/B) ratio. MVA - however focuses on total market value and total invested capi


45. Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain.

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46. What do asset activity ratios measure?
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt
Sales
Inventory Turnover = Sales / Inventory


47. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = 5000000/3000000 = 1.67
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Inventory Turnover = Sales / Inventory


48. The ____________________________measures the average return on the firm's capital contributions from its owners.
Debt to equity ratio
Credit sales = $4000000
Gross Profit Margin = Gross Profit / Sales
Return on equity


49. Under what circumstances would market to book value ratios be misleading? Explain.
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel
Return on equity
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm
Average collection period


50. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations
Current assets - inventory = $50000 - (.5
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Industry analysis