LECTURE GUIDE/QUIZ
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?
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?
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
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
a problem with the efficiency of one of the assets but would not specify which asset
a problem with the efficiency of all assets
a problem with sales
a problem with the efficiency of one of assets but would specify which asset
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
how likely the company is to go bankrupt
how high the company’s financial risk is
whether the company can pay its debt and its interest on debt
how leveraged the company is
all of the above
none of the above
23. Leverage ratios indicate
how high the company’s debt is
what percent of the company is financed with debt
how much interest the company has to pay
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
how well the company’s interest expense is covered
how easy it is for the company to pay its interest expense
how many times the company can pay for its interest expense out of its earnings (EBIT).
All of the above
None of the above
29. State the formula for the times-interest-earned (TIE) ratio.
30. Profitability ratios indicate
how much profit the company made in $ amounts.
How much the company is earning for its owners.
Whether the company made a profit or loss
All of the above
None of the above
31. The profit margin indicates
what % of each dollar in sales ends up in net income.
what % of each dollar in sales is tied up in expenses.
How much profit the company made.
How much profit each stockholder should expect
A and b
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
the profit margin
the ROA
the ROE
none of the above
37. Equity consists of two accounts on the balance sheet: __________________ and ____________________.
38. Leverage means
using debt to finance a company’s operations
using somebody else’s money to make money for the stockholder
increasing the ROE for stockholders by using debt
increasing a company’s debt
a-c
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.