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63 Cards in this Set

  • Front
  • Back
what are financial ratios used for?
identifies the major strengths and weaknesses of a firm
Who uses financial ratios?
financial managers
credit managers
security analysis
what are the main financial statements used in financial analysis?
Common-size financial statements
-- common-size balance sheet
-- common-size income statement
Statement of Cash flows
what are 3 components of stockholder's equity?
retained earnings
common stock
contribution capital
what are 6 basic types of ratios?
Asset Management
Financial Leverage
Dividend Policy
current ratio= current assets/current liabilities

quick ratio= (current assets-inventories)/current liabilities
asset management
avg. collection period
inventory turnover
fixed-asset turnover
total asset turnover
avg collection period
accounts receivable/(annual credit sales/365)
inventory turnover
cost of sales/ average inventory
fixed-asset turnover
sales/net fixed assets
total asset turnover
sales/ total assets
financial leverage
Involves the use of liabilities and preferred stock having fixed costs

debt ratio
debt to equity ratio
times interest earned
fixed charge coverage
debt ratio
total debts/ total assets
debt to equity ratio
total debt/total equity
gross profit margin
net profit margin
P/E ratio
market to book ratio
dividend policy
payout ratio
dividend yield
what are some of the key points related to interpreting financial ratios?
a ratio by itself is meaningless
need to be looked over time and in relation to the firms performance
What are some of the limitations and problems associated with the use of ratios/ratio analysis?
-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
what is the altmans z score and what is it used for?
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
what is a key piece of data that helps distinguish which z-score formula to use?
75- Market Val
76- book val- substitutes mkt val no mkt price info provided
77-book val-" "
The basic differences between short-run and long run costs
one all costs change (long run) other only has one cost changing (short run)
short-run costs
variable increase exponentially
fixed are constant
long run cost
all costs are variable
operating leverage
financial leverage
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
relationships of variables on incomes statement
fixed costs
variable costs
capital costs
3 main determinants of dividend policy
legal constraints
restrictive covenants
tax condsideration
legal constraints
capital impairment restriction
net earnings restriction
insolvency restriction
restrictive covenants
generally have more impact than legal constraints
contained in bond indentures, loan conditions, etc
limits dividends that can be paid
tax consideration
corporate tax implications
individual income tax rates on dividends vs. capital gains
two theories of relevance of dividends?
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
+issuance (flotation) costs
+agency costs
different theories on relevance of dividends, conclusions?
many practicioners believe that dividends are important :
+for their informational content
+because external equity capital is more expensive than retained equity
major dividend payout policies and main characteristics
constant payout ratio
small regular dividends plus extras
small firms and dividends
which is the following financial ratios in and example of a market-based ratio?
a. debt to equity
b. price-to-earnings
c. return on investment
d. gross profit margin
the primary weakness of the current ratio is
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
__________ indicates how efficiently a firm is using its assets to generate sales.
a. liquidity
b. asset management
c. Financial leverage
d. equity
a common size balance sheet shows the firm's assets and liabilities as a percentage of
a. stockholder's equity
b. industry averages
c. total assets
d. net sales
return on stockholder' equity is equal to ___times___times____.
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.
stocks with _____ dividend yield often indicate _____ expected growth.
a. high,high
b. low, low
c. low, high
d. no, low
although ratios can provide valuable information they can also misleading for the following reasons:
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
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?
a 8
b 32
c 64
d 16
raw material and direct labor costs are examples of:
a fixed cost
b overhead costs
c variable cost
d capital cost
when fixed operation costs are incurred by the firm a change in _____ is magnified into a larger change in earnings per share
a. earnings before interest and taxes
b interest charges
c overhead expenses
d preferred dividends
the degree of combined leverage is equal to the __ multiplied by the ______
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
A DFL of 3.0 indicates that a 27% increase in EPS is the result of a ____________ increase in EBIT
a 8%
b 9%
c 3%
d 6%
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)
a 0.68
b 2.0
c 1.47
d 0.32
the break even point occurs where total revenues equals:
a total costs
b the risk-free rate
c market returns
d total interest and taxes
the contribution margin per unit is the difference between:
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
the following factors influence a firm's ability and/or willingness to pay dividends
a liquidity
b borrowing capacity and access to capital markets
c earnings stability
d all of the above
in the theoretical world of miller and modigliani
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
a passive residual dividend policy suggests that the firm will
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
dividend payments reduce all of the following balance sheet items except
a cash
b fixed assets
c stockholder's equity
d retained earnings
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:
a constant payout ratio
b stable dollar
c passive residual
d reinvestment
times interest earned
EBIT/ interest charges
Fixed charge coverage
(EBIT+lease pmt)/ (interest+least pmt + P/S div before tax + pre-tax sinking fund)
gross profit margin
sales-cost of sales/sales
net profit margin
EAT/total assets
EAT/stockholder's equity
P/E ratio
market price per share/ current earnings per share
market to book ratio
market price per share/book value per share
payout ratio
dividends per share/ EPS
dividend yield
expected dividends per share/stock price