ENG103: Academic English                                                                                                              Name _____________
for Critical Thinking and Communication in Business (BU113)
Ch. Bauer-Ramazani

FINANCE: Ratio Analysis

DIRECTIONS:          Use the notes you took in class to complete the following questions.  T/F, MC, and Fill-in-the-blank questions count 2 points; points for essay questions vary (see points in parentheses).

1.      What do liquidity ratios indicate?

  1. Whether the company is liquid, i.e. can turn its assets quickly into cash
  2. Whether the company has enough current assets to pay off current liabilities
  3. Whether the company can easily pay off its short-term liabilities, e.g. outstanding accounts to suppliers, interest expense, tax expense
  4. Whether the company has sufficient funds (cash, liquid accounts) to pay off its debt
  5. All of the above

2.      Current assets include ___________, _______________, and _______________ but not ___________________. 

3.      State the formula for the current ratio.

4.      T/F             A current ratio of .33x would indicate sufficient funds to pay off debt.

5.   T/F              The quick ratio focuses on quick assets, i.e. those that can be quickly turned into cash.

6.      Which of the following current assets will take the longest to turn into cash?

  1. accounts receivable
  2. inventory
  3. equipment
  4. cash

7.  State the formula for the quick ratio. 

8.  T/F              The quick ratio subtracts inventory from current assets because it is the least liquid current asset.

9.  T/F              A quick ratio of .20x indicates that the company has sufficient funds to pay off debt.

10.   Operating ratios indicate

  1. Whether the company is operating efficiently or not
  2. Whether the company is under- or overusing its assets
  3. Whether the company is using its current and fixed assets efficiently or not
  4. Whether the company is utilizing its assets efficiently to generate sales
  5. All of the above

11.  T/F            An operating ratio that is higher than the industry average indicates a problem with efficiency.

12.  T/F            The operating ratios should be based on annual figures.

13.   State the formula for the asset turnover ratio.

14.  A low asset turnover ratio could indicate

  1. a problem with the efficiency of one of the assets but would not specify which asset

  2. a problem with the efficiency of all assets

  3. a problem with sales

  4. a problem with the efficiency of one of assets but would specify which asset

  5. none of the above

15.  T/F            The inventory turnover ratio and fixed asset turnover ratio indicate which of the assets are used efficiently or inefficiently.

16.   The inventory turnover ratio indicates how _________________________________________________________________.

17.   State the formula for the inventory turnover ratio.

18.  T/F            The higher the inventory turnover ratio, the more the company is replacing (restocking) its inventory.

19.  T/F            A high inventory turnover ratio always indicates an efficient business operation.

20.    State the formula for the fixed asset turnover ratio.

21.  T/F            The fixed asset turnover (FA/TO) ratio must be compared with other FA/TO ratios in the same industry.

22.   Debt management ratios indicate

  1. how likely the company is to go bankrupt

  2. how high the company’s financial risk is

  3. whether the company can pay its debt and its interest on debt

  4. how leveraged the company is

  5.  all of the above

  6. none of the above

23.   Leverage ratios indicate

  1. how high the company’s debt is

  2. what percent of the company is financed with debt

  3. how much interest the company has to pay

  4. how much debt is outstanding

24.  State the formula for the debt-to-equity ratio.

25.  T/F            A leverage ratio of 54% indicates that more than half of the company is financed with debt.

26.    State the formula for the debt-to-asset ratio.

27.    The debt-to-asset ratio indicates what percent of assets is ________________________________________________________________________.

28.  Coverage ratios indicate

  1. how well the company’s interest expense is covered

  2. how easy it is for the company to pay its interest expense

  3. how many times the company can pay for its interest expense out of its earnings (EBIT).

  4. All of the above

  5. None of the above

29.   State the formula for the times-interest-earned (TIE) ratio.

30.  Profitability ratios indicate

  1. how much profit the company made in $ amounts.

  2. How much the company is earning for its owners.

  3. Whether the company made a profit or loss

  4. All of the above

  5. None of the above

31.  The profit margin indicates

  1. what % of each dollar in sales ends up in net income.

  2. what % of each dollar in sales is tied up in expenses.

  3. How much profit the company made.

  4. How much profit each stockholder should expect

  5. A and b

  6. C and d

32.  T/F            A profit margin of 5% is desirable in every industry.

33.    State the formula for the profit margin.

34.    State the formula for the return-on-assets ratio (ROA).

35.    State the formula for the return-on-equity (ROE) ratio.

36.  Stockholders are mostly interested in

  1. the profit margin

  2. the ROA

  3.  the ROE

  4. none of the above

37.   Equity consists of two accounts on the balance sheet: __________________ and ____________________.

38.  Leverage means

  1. using debt to finance a company’s operations

  2. using somebody else’s money to make money for the stockholder

  3. increasing the ROE for stockholders by using debt

  4. increasing a company’s debt

  5. a-c

  6. d only

39.  T/F            A company with no debt has a higher ROE than one with debt (all other things being equal).

40.  T/F            Many companies issue debt instead of equity to increase the return to the stockholders.

41.  T/F            Companies that issue debt instead of equity increase the return to stockholders but also increase the financial risk of the company.

42.    The higher the risk, the _____________________________________ that is expected by the stockholders.

43.  T/F            Valuation ratios indicate the value of the company.

44.   State the formula for earnings-per-share (EPS).

45.  State the formula for the price-to-earnings (P/E) ratio.

46.   T/F            The P/E ratio is used to compare how investors value one company against another.

47.  T/F            A P/E ratio that uses a company’s current earnings is as valuable as the one that uses projected earnings.

48.  T/F            A higher P/E ratio indicates a higher valuation by stockholders.

49.  T/F            A drop in a company’s earnings growth rate would increase the value of the P/E ratio.

50.  State the formula for calculating a company’s market value.