Final Finance

Front 1

what are financial ratios used for?

Back 1

identifies the major strengths and weaknesses of a firm

Front 2

Who uses financial ratios?

Back 2

financial managers
credit managers
security analysis
bankers
unions

Front 3

what are the main financial statements used in financial analysis?

Back 3

Common-size financial statements
-- common-size balance sheet
-- common-size income statement
Statement of Cash flows

Front 4

what are 3 components of stockholder's equity?

Back 4

retained earnings
common stock
contribution capital

Front 5

what are 6 basic types of ratios?

Back 5

Liquidity
Asset Management
Financial Leverage
Profitability
Market-Based
Dividend Policy

Front 6

liquidity

Back 6

current ratio= current assets/current liabilities

quick ratio= (current assets-inventories)/current liabilities

Front 7

asset management

Back 7

avg. collection period
inventory turnover
fixed-asset turnover
total asset turnover

Front 8

avg collection period

Back 8

accounts receivable/(annual credit sales/365)

Front 9

inventory turnover

Back 9

cost of sales/ average inventory

Front 10

fixed-asset turnover

Back 10

sales/net fixed assets

Front 11

total asset turnover

Back 11

sales/ total assets

Front 12

financial leverage

Back 12

Involves the use of liabilities and preferred stock having fixed costs

formulas:
debt ratio
debt to equity ratio
times interest earned
fixed charge coverage

Front 13

debt ratio

Back 13

total debts/ total assets

Front 14

debt to equity ratio

Back 14

total debt/total equity

Front 15

profitability

Back 15

gross profit margin
net profit margin
ROI
ROE

Front 16

market-based

Back 16

P/E ratio
market to book ratio

Front 17

dividend policy

Back 17

payout ratio
dividend yield

Front 18

what are some of the key points related to interpreting financial ratios?

Back 18

a ratio by itself is meaningless
need to be looked over time and in relation to the firms performance

Front 19

What are some of the limitations and problems associated with the use of ratios/ratio analysis?

Back 19

-ratios only as reliable as the accounting data on which they are based on
- be cautious industry norms with out measure of dispersion
- comparative analysis depends on the availability of data for each industry
--- ratios look at HISTORIC info

Front 20

what is the altmans z score and what is it used for?

Back 20

captures different aspects of profitability & risk
networking capital/ total assets = X1
Retained earnings/total assets = X2
earnings before interest and taxes/total assets = X3
Market value(book val) of equity/book val of total debt = X4
sales/total assets= X5

GS 75, 76, 77

Front 21

what is a key piece of data that helps distinguish which z-score formula to use?

Back 21

75- Market Val
76- book val- substitutes mkt val no mkt price info provided
77-book val-" "

Front 22

The basic differences between short-run and long run costs

Back 22

one all costs change (long run) other only has one cost changing (short run)

Front 23

short-run costs

Back 23

variable increase exponentially
fixed are constant

Front 24

long run cost

Back 24

all costs are variable

Front 25

Leverage
operating leverage
financial leverage

Back 25

Using borrowed money to gain higher return, or gain control of a larger asset than you otherwise could

operating- involves the use of assets having fixed costs
financial - involves the use of liabilites and preferred stock having fixed cost

Front 26

relationships of variables on incomes statement

Back 26

fixed costs
variable costs
capital costs

Front 27

3 main determinants of dividend policy

Back 27

legal constraints
restrictive covenants
tax condsideration

Front 28

legal constraints

Back 28

capital impairment restriction
net earnings restriction
insolvency restriction

Front 29

restrictive covenants

Back 29

generally have more impact than legal constraints
contained in bond indentures, loan conditions, etc
limits dividends that can be paid

Front 30

tax consideration

Back 30

corporate tax implications
individual income tax rates on dividends vs. capital gains

Front 31

two theories of relevance of dividends?

Back 31

con-- Miller and Modigliani: assumptions- no taxes, no transaction costs, no issuance costs, fixed investment policy.
+informational content
+signaling effects
+clientele effect

pro--Gordon: remove assumptions:dvidend policy becomes important
+risk aversion
+transaction costs
+taxes
+issuance (flotation) costs
+agency costs

Front 32

different theories on relevance of dividends, conclusions?

Back 32

many practicioners believe that dividends are important :
+for their informational content
+because external equity capital is more expensive than retained equity

Front 33

major dividend payout policies and main characteristics

Back 33

constant payout ratio
small regular dividends plus extras
small firms and dividends

Front 34

which is the following financial ratios in and example of a market-based ratio?

Back 34

a. debt to equity
b. price-to-earnings
c. return on investment
d. gross profit margin

Front 35

the primary weakness of the current ratio is

Back 35

a. it includes some items, such as inventory, may not be readily liquid
b. it is difficult to calculate
c. it requires many years of past data
d. it includes many non-current items in its calculation

Front 36

__________ indicates how efficiently a firm is using its assets to generate sales.

Back 36

a. liquidity
b. asset management
c. Financial leverage
d. equity

Front 37

a common size balance sheet shows the firm's assets and liabilities as a percentage of

Back 37

a. stockholder's equity
b. industry averages
c. total assets
d. net sales

Front 38

return on stockholder' equity is equal to ___times___times____.

Back 38

a. net profit margin; fixed asset; equity multiplier ratio
b. gross profit margin; total asset turnover; equity multiplier ratio
c. net profit margin; total asset turnover; debt-to-equity ratio
d. net profit margin; total asset turnover; equity multiplier ratio.

Front 39

stocks with _____ dividend yield often indicate _____ expected growth.

Back 39

a. high,high
b. low, low
c. low, high
d. no, low

Front 40

although ratios can provide valuable information they can also misleading for the following reasons:

Back 40

a. ratios are only as reliable as the accounting data on which they are based
b. compilation of industry norms often do not report info about the distribution of values.
c. comparative analysis depends on the availability of data for appropriately defined industries
d. all of the above are correct
d.

Front 41

a firms price to earnings ratio is 8 its market to book ratio is 2. if its earnings per share are $.00 what is the book value per share?

Back 41

a 8
b 32
c 64
d 16

Front 42

raw material and direct labor costs are examples of:

Back 42

a fixed cost
b overhead costs
c variable cost
d capital cost

Front 43

when fixed operation costs are incurred by the firm a change in _____ is magnified into a larger change in earnings per share

Back 43

a. earnings before interest and taxes
b interest charges
c overhead expenses
d preferred dividends

Front 44

the degree of combined leverage is equal to the __ multiplied by the ______

Back 44

a degree of operation leverage, variable cost ratio
b degree of financial leverage, variable cost ratio
c degree of operating leverage, degree of financial leverage.
d degree of operating leverage, fixed cost ratio

Front 45

A DFL of 3.0 indicates that a 27% increase in EPS is the result of a ____________ increase in EBIT

Back 45

a 8%
b 9%
c 3%
d 6%

Front 46

last year Avator's operating income (EBIT) increase by 22% while is dollar sales increased by 15%. What is Avator's degree of operating leverage (DOL)

Back 46

a 0.68
b 2.0
c 1.47
d 0.32

Front 47

the break even point occurs where total revenues equals:

Back 47

a total costs
b the risk-free rate
c market returns
d total interest and taxes

Front 48

the contribution margin per unit is the difference between:

Back 48

a the selling price per unit and fixed costs
b the fixed costs and the variable costs
c the variable cost per unit and the selling price per unit
d the variable costs and the number of units sold

Front 49

the following factors influence a firm's ability and/or willingness to pay dividends

Back 49

a liquidity
b borrowing capacity and access to capital markets
c earnings stability
d all of the above

Front 50

in the theoretical world of miller and modigliani

Back 50

a firm should pay out 100 percent of earnings as dividends to maximize shareholder wealth
b the marginal tax rates facing investors are the most important single determinant of dividend policy
c dividends are important only for their informational content
d dividends reduce investors' uncertainty

Front 51

a passive residual dividend policy suggests that the firm will

Back 51

a pay a dividend only afterall viable investments projects have been exhausted
b pay the same percentage of earnings in dividends every year
c pay the same dollar amount of dividends every year
d omit a dividend in the next period

Front 52

dividend payments reduce all of the following balance sheet items except

Back 52

a cash
b fixed assets
c stockholder's equity
d retained earnings

Front 53

according to the _______ dividend policy, a firm that has more funds than it needs for positive NPV investments should pay a cash dividend to shareholders:

Back 53

a constant payout ratio
b stable dollar
c passive residual
d reinvestment

Front 54

times interest earned

Back 54

EBIT/ interest charges

Front 55

Fixed charge coverage

Back 55

(EBIT+lease pmt)/ (interest+least pmt + P/S div before tax + pre-tax sinking fund)

Front 56

gross profit margin

Back 56

sales-cost of sales/sales

Front 57

net profit margin

Back 57

EAT/sales

Front 58

ROI

Back 58

EAT/total assets

Front 59

ROE

Back 59

EAT/stockholder's equity

Front 60

P/E ratio

Back 60

market price per share/ current earnings per share

Front 61

market to book ratio

Back 61

market price per share/book value per share

Front 62

payout ratio

Back 62

dividends per share/ EPS

Front 63

dividend yield

Back 63

expected dividends per share/stock price