Chapter 3 Finance
Nicole Morrissey CQ 4, 7
BUS2215 Problems 1-8, 12, 17, 18
February 8, 2012
4. Financial Ratios Fully explain the kind of information the following financial ratios provide about a firm:
Quick Ratio | This ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, which is why inventory is omitted. | Cash Ratio | This assesses a company’s financial durability by examining whether it is at least profitable enough to pay off its interest expenses. | Total Asset Turnover | Tells us the amount of sales generated for every dollar worth of assets. | Equity Multiplier | Tells us how a company uses debt to finance its assets. | Long-term Debt Ratio | Measures the percentage of the overall company’s assets that are owned by the equity and debt. | Times Interest Earned Ratio | (TIE) Tells us about a company’s ability to meet it’s debt obligations. This could force a company into bankruptcy. | Profit Margin | Measures how much out of every dollar of sales a company actually keeps in earnings. | Return on Assets | Displayed as a percentage. An indicator of how profitable a company is relative to its total assets. | Return on Equity | Displayed as a percentage. Measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. | Price-Earnings Ratio | A valuation ratio of a company’s current share price compared to its per-share earnings. A high P/E suggests investors are expecting higher earning growth in the future. |
7. Du Pont Identity Why is the Du Pont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.
The Du Pont identity is a valuable tool for analyzing the performance of a firm because it breaks return on equity (ROE) into three parts: operating efficiency, asset use efficiency, and financial
BUS2215 Problems 1-8, 12, 17, 18
February 8, 2012
4. Financial Ratios Fully explain the kind of information the following financial ratios provide about a firm:
Quick Ratio | This ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, which is why inventory is omitted. | Cash Ratio | This assesses a company’s financial durability by examining whether it is at least profitable enough to pay off its interest expenses. | Total Asset Turnover | Tells us the amount of sales generated for every dollar worth of assets. | Equity Multiplier | Tells us how a company uses debt to finance its assets. | Long-term Debt Ratio | Measures the percentage of the overall company’s assets that are owned by the equity and debt. | Times Interest Earned Ratio | (TIE) Tells us about a company’s ability to meet it’s debt obligations. This could force a company into bankruptcy. | Profit Margin | Measures how much out of every dollar of sales a company actually keeps in earnings. | Return on Assets | Displayed as a percentage. An indicator of how profitable a company is relative to its total assets. | Return on Equity | Displayed as a percentage. Measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. | Price-Earnings Ratio | A valuation ratio of a company’s current share price compared to its per-share earnings. A high P/E suggests investors are expecting higher earning growth in the future. |
7. Du Pont Identity Why is the Du Pont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.
The Du Pont identity is a valuable tool for analyzing the performance of a firm because it breaks return on equity (ROE) into three parts: operating efficiency, asset use efficiency, and financial