Short Term 531 Week 1 Quiz
Short-Term Solvency Ratio: A) Current Ratio = Current Assets / Current Liabilities, B) Quick Ratio = (Current Assets – Inventory) / Current Liabilities, C) Cash Ratio = Cash / Current Liabilities
Asset Utilization Ratios: A) Turnover = Sales / Total Assets, B) Inventory Turnover = Cost of Goods Sold / Inventory, C) Receivables Turnover = Sales / Accounts Receivables
Long-term Solvency Ratio: A) Total Debt Ratio = Total Debt (Current Liabilities + Long term Liabilities) / Total Assets, B) Debt-Equity Ratio = Total Debt / Total Equity, C) Equity Multiplier = Total Assets / Total Equity, D) Times Interest Earned = EBIT (Earnings Before Interest & Tax) / Interest Expense, E) Cash Coverage Ratio = (EBIT + Depreciation) / Interest Expense …show more content…
Profitability Ratios: A) Profit Margin = Net Income / Sales, B) Return on Assets (ROA) = Net Income / Total Assets, C) Return on Equity (ROE) = Net Income / Equity
Others: Days Sales in Inventory = 365 / Inventory Turnover (COGS / Inventory), Debt Ratio = Total Debt / Total Assets,
DuPont Identity: ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
Balance Sheet: Assets, Liabilities, Inventory, Accounts Receivables, Equity
Income Statement: Sales, Cost of Goods Sold, Depreciation, EBIT, Interest Paid, Net Income, Dividends
CHP1&2 The form of business subject to the highest taxation to itself and owners is a: C-Corp\ Which form of business issues shares to its owners, limits the number of shareholders, but avoid being taxed as a corporation?
S-Corp\ Which form of business has no differentiation or liability protection for its owner(s)? Sole Pro\ Increasing the market price of a companies stock will always lead to shareholder wealth …show more content…
maximization. False\ Management is seeking to provide the best long term value for the shareholders. This concept is referred to as: Shareholders Wealth Maximization\ The "True" Value of a stock is called the: Intrinsic Value\ The price of the last sale on the NYSE of a share of stock is the: Market Price\ If a stock's market price is equal to the intrinsic value then the stock is considered to be at: Equilibrium\ An investment project is good for the long term value of a company.\ A marketplace buying and selling tangible assets is referred to as a: Physical Market\ A marketplace buying and selling options to trade other assets or contracts that have a value based on another security is done in a: Derivatives Market\ Which type of market is designed for short term investments or debt securities? Money Market\ The goal of the firm's management in the long run should be to push the stock price to the: Highest Intrinsic Value\ Capital allocation connects savers/investors with business that would like to use the money of the savers to grow their business\ Goldman Sachs is an investment bank.\ Insurance companies are also financial intermediaries.\ the spot market requires buyers and sellers to settle immediately\ The money market is where short term debts and securities are bought and sold. It also includes longer term bonds that are maturing in the short term period.\ The capital market is where stocks, long term bonds, and other financial instruments with long term intentions. Typically anything 2-3 years in term or greater.\ A security that draws its value from the price of some other asset is called Derivatives\ Mortgages are long term borrowing typically for 15-30 years and would be bought and sold in the capital market.\ Physical goods like wheat, coal, gold are all trade on the physical market\ Investment Banks specialize in issuing new securities and facilitate in raising capital for entities needing additional financial resources.\ Commercial banks specialize in offering financial services on a retail level to consumers and businesses. Typically commercial banks are part of larger financial services corporations.\ Credit unions combine the power of consumers together. They take risks as a group on other members. The strength of a credit union is based on the strength of its members. Pooling money together brings down costs against other commercial or traditional banks.\ Hedge funds are investor pools for large net worth investors.\ CHP. 3 A financial statement which groups together similar assets and similar liabilities, using a number of standard classifications and sections is called Balance Sheet\ Assets reported on a Classified Balanced sheet are listed by order of Liquidity\ Liabilities are listed on a Classified Balance sheet by: Payment terms, Short term First then to Long term\ A Current asset is Expected to convert to cash within one year\ An operating cycle is: The time it takes to start with cash, acquire or produce products, sell products on account (Receivables), and to receive the cash again. Cash to Cash\ Assets with long lives used to in current operating activities are Property, Plant and Equipment (PPE)\ An intangible asset is Definition, a Brand name, Logo, or other goodwill\ Ratio analysis uses standardized mathematical formulas to compare financial statements. The key is with the standardized formulas it means that common measurements can be used even if the companies are not the same size, industry, revenues size etc.\ Comparing a company to itself is Intracompany analysis\ Comparing a company to other companies is Intercompany analysis\ Comparing company to industry standards or average is industry-average analysis\ Profitability ratios measure the operating success of a company for a given period of time on several factors but all revolve around profit gained.\ Earnings per share is a measure of the net income on each share of common stock\ The statement of retained earnings reports the changes for the given year and then reports it in the equity section of the balance sheet\ A Statement used to report all changes in equity is called: Statement of Stockholders' Equity\ Changes in the number of shares would be included in the statement of stockholders' equity\ Liquidity ratios address the ability to pay obligations expected to become due within the next year or operating cycle, looking closing at the relationship of current assets and current liabilities.\ Working Capital = current assets - current liabilities\ Current liabilities exceed current assets shows a difficult to pay short term debts\ Current Ratio = Current Assets / Current Liabilities\ A weakness of the current ratio It does not take into account the composition of current assets\ Solvency ratios measure the ability of the company to survive over a long period of time\ GAAP is Guidance from a set of rules that have authoritative support\ The United States governmental agency that oversees financial markets and accounting standard-setting bodies Securities and Exchange Commission\ Sarbanes-Oxley Act required a government agency to determine auditing standards and review performance of auditing firms Public Company Accounting Oversight Board (PCAOB)\ Qualities of Financial statements that are imperative to the users are all of these except: US Dollar Based\ Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur\ Cash accounting only records a transaction if cash is paid/received in the time period.
No cash accounting transactions are ignored.\ Which of the following is an Assumption of financial statements? Perodicity, Going Concern, Accrual Basis\ principle dictates that companies record assets at their historical cost principle dictates that companies record assets at their historical cost\ The materiality constraint Relates to a financial statement item's impact on a company's overall financial condition and operations. Size is a big factor.\ Revenues - COGS - Admin Expense = Earnings\ Cash + Inventory + A/R = Current Assets\ Accounts Payable + Short term N/P = Current Liabilities\ Working Capital = current assets – current liabilities\ Net Operating Working Capital = Current assets - Current liabilities - Notes Payable\ Net Operating Working Capital takes into consideration the interest bearing loans. Notes paying interest also have an impact on the financial statements and company performance because of the interest costs. NOWC show what would be leftover to operating with if these loans were paid.\ Earnings
Before Interest and Taxes (EBIT) is the term used to refer to Operating income.\ Revenues - Operating Costs = EBIT (Operating Income)\ CHP.4 Annual report gives information\ Day Sales Outstanding is used to measure the number of days worth of sales that are represented in the accounts receivables. (Receivables / Average Sales per day)\ Inventory Turnover Ratio is used to measure how efficiency the inventory value was used over the course of a period of time. Higher turnover is better. (Cost of Goods Sold / Inventory) \ Fixed Asset Turnover Ratio measures how well a company utilized fixed assets. (Sales / Net Fixed Assets)\ Asset Turnover shows the ability for the company to use total investment in assets. (Sales / total assets)\ Debt to Assets compares the amount of debt to the amount of assets (Total Debt / Total Assets)\ Times Interest Earned Ratio measure how much more operating income than interest that has to be paid. it allows an analyst to determine how much debt or interest the company can truly afford to pay. (Operating income [EBIT] / Interest Expense)\ Profit Margin is the measure of how much of the sales dollars actually becomes profit (net income / sales)\ Return on Assets compares the income against the total assets to see how efficiently the assets were used in producing a profit. (Net Income / Total Assets)\ Operating margin evaluates how well a company can turn sales into operating income. (EBIT / Sales)\ Return on Equity measures how well the value of equity was used to produce a profit (Net Income / Equity)\ Analysts use the Price earnings ratio to compare the most recent annual earnings of a company to its current stock price. (Market Price per Share / Earnings per share)\ Market/Book Ratio compares the current market value to book value of a stock. (Market Price per Share / book value per share)\ A standard created to evaluate performance that can be universal and not dependent upon outside factors is referred to as benchmark\ Companies will often look at performance over time to find indicators. This analysis is called: Trend Analysis\ CHP. 5 When a future value is converted to a present value by reducing it, this is called Discounting
Paul’s Power Tools, Inc. had a Debt ratio of 81%.
Debt Ratio = Total Debt / Total Assets = .81 or 81% Assets = 100% or 1.00 Debt = 81% or .81 Equity = 19% or .19 (Assets = Debt + Equity)
6a. The debt-to-equity ratio for Paul’s Power Tools is _____times.
6a. Debt – Equity Ratio = Total Debt / Total Equity .81/.19 = 4.263157895 4.26 times
6b. The equity multiplier for Paulette's Plants is ________times.
6b. Equity Multiplier = Assets / Equity = 1 + Debt – Equity Ratio
1.0/ .19 = 5.263157895
5.26 times
Wally’s Walkers and Whatnot Products has a profit margin of 9%, sales of $1,000,000, debt of $250,000, total assets of $14,000,000. The ROA for Wally's is ____%
Profit Margin = 9% Profit Margin = Net Income / Sales Sales = 1,000,000 .09 = Net Income / 1,000,000 Net Income = 90,000
ROA = Net Income / Total Assets Net Income = 90,000 Total Assets = 14,000,000 90,000/14,000,000 = .006428571 ROA = .64%
NOM/Annual Percentage Rate, C/Y/Comps/Year, EAR/EFF%
Calculating EAR: Last National Bank charges 13.2 percent compounded monthly on its business loans. First Diversified Bank charges 13.5 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
Calculating APR: Calzon Credit Corp. wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
Easydoesit Life Insurance Company is selling a perpetuity contract that pays a $936 monthly. The contract currently sells for $93,600. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?
Monthly return = ____________% 936/93600= 1.00
APR = _______________% 936/93600= 1.00 x 12 = 12
You receive a credit card application from Chameleon Banks Savings and Loan offering an introductory rate of 2.49 percent per year, compounded monthly for the first six months, increasing thereafter to 16 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?
First 6 months, For next 6 months,
N = 6 N= 6
I/Y = 2.49/12 I/Y = 16/12
PV = -10000 PV = -10125.14763
FV = ? FV = ?
FV = -10125.14763 FV = 10962.64467 Total Interest = 10962.64467– 10000 = 962.64467 Answer: 962.64
•*EPS = Net Income / Outstanding Shares
Asset Utilization Ratios: A) Turnover = Sales / Total Assets, B) Inventory Turnover = Cost of Goods Sold / Inventory, C) Receivables Turnover = Sales / Accounts Receivables
Long-term Solvency Ratio: A) Total Debt Ratio = Total Debt (Current Liabilities + Long term Liabilities) / Total Assets, B) Debt-Equity Ratio = Total Debt / Total Equity, C) Equity Multiplier = Total Assets / Total Equity, D) Times Interest Earned = EBIT (Earnings Before Interest & Tax) / Interest Expense, E) Cash Coverage Ratio = (EBIT + Depreciation) / Interest Expense …show more content…
Profitability Ratios: A) Profit Margin = Net Income / Sales, B) Return on Assets (ROA) = Net Income / Total Assets, C) Return on Equity (ROE) = Net Income / Equity
Others: Days Sales in Inventory = 365 / Inventory Turnover (COGS / Inventory), Debt Ratio = Total Debt / Total Assets,
DuPont Identity: ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
Balance Sheet: Assets, Liabilities, Inventory, Accounts Receivables, Equity
Income Statement: Sales, Cost of Goods Sold, Depreciation, EBIT, Interest Paid, Net Income, Dividends
CHP1&2 The form of business subject to the highest taxation to itself and owners is a: C-Corp\ Which form of business issues shares to its owners, limits the number of shareholders, but avoid being taxed as a corporation?
S-Corp\ Which form of business has no differentiation or liability protection for its owner(s)? Sole Pro\ Increasing the market price of a companies stock will always lead to shareholder wealth …show more content…
maximization. False\ Management is seeking to provide the best long term value for the shareholders. This concept is referred to as: Shareholders Wealth Maximization\ The "True" Value of a stock is called the: Intrinsic Value\ The price of the last sale on the NYSE of a share of stock is the: Market Price\ If a stock's market price is equal to the intrinsic value then the stock is considered to be at: Equilibrium\ An investment project is good for the long term value of a company.\ A marketplace buying and selling tangible assets is referred to as a: Physical Market\ A marketplace buying and selling options to trade other assets or contracts that have a value based on another security is done in a: Derivatives Market\ Which type of market is designed for short term investments or debt securities? Money Market\ The goal of the firm's management in the long run should be to push the stock price to the: Highest Intrinsic Value\ Capital allocation connects savers/investors with business that would like to use the money of the savers to grow their business\ Goldman Sachs is an investment bank.\ Insurance companies are also financial intermediaries.\ the spot market requires buyers and sellers to settle immediately\ The money market is where short term debts and securities are bought and sold. It also includes longer term bonds that are maturing in the short term period.\ The capital market is where stocks, long term bonds, and other financial instruments with long term intentions. Typically anything 2-3 years in term or greater.\ A security that draws its value from the price of some other asset is called Derivatives\ Mortgages are long term borrowing typically for 15-30 years and would be bought and sold in the capital market.\ Physical goods like wheat, coal, gold are all trade on the physical market\ Investment Banks specialize in issuing new securities and facilitate in raising capital for entities needing additional financial resources.\ Commercial banks specialize in offering financial services on a retail level to consumers and businesses. Typically commercial banks are part of larger financial services corporations.\ Credit unions combine the power of consumers together. They take risks as a group on other members. The strength of a credit union is based on the strength of its members. Pooling money together brings down costs against other commercial or traditional banks.\ Hedge funds are investor pools for large net worth investors.\ CHP. 3 A financial statement which groups together similar assets and similar liabilities, using a number of standard classifications and sections is called Balance Sheet\ Assets reported on a Classified Balanced sheet are listed by order of Liquidity\ Liabilities are listed on a Classified Balance sheet by: Payment terms, Short term First then to Long term\ A Current asset is Expected to convert to cash within one year\ An operating cycle is: The time it takes to start with cash, acquire or produce products, sell products on account (Receivables), and to receive the cash again. Cash to Cash\ Assets with long lives used to in current operating activities are Property, Plant and Equipment (PPE)\ An intangible asset is Definition, a Brand name, Logo, or other goodwill\ Ratio analysis uses standardized mathematical formulas to compare financial statements. The key is with the standardized formulas it means that common measurements can be used even if the companies are not the same size, industry, revenues size etc.\ Comparing a company to itself is Intracompany analysis\ Comparing a company to other companies is Intercompany analysis\ Comparing company to industry standards or average is industry-average analysis\ Profitability ratios measure the operating success of a company for a given period of time on several factors but all revolve around profit gained.\ Earnings per share is a measure of the net income on each share of common stock\ The statement of retained earnings reports the changes for the given year and then reports it in the equity section of the balance sheet\ A Statement used to report all changes in equity is called: Statement of Stockholders' Equity\ Changes in the number of shares would be included in the statement of stockholders' equity\ Liquidity ratios address the ability to pay obligations expected to become due within the next year or operating cycle, looking closing at the relationship of current assets and current liabilities.\ Working Capital = current assets - current liabilities\ Current liabilities exceed current assets shows a difficult to pay short term debts\ Current Ratio = Current Assets / Current Liabilities\ A weakness of the current ratio It does not take into account the composition of current assets\ Solvency ratios measure the ability of the company to survive over a long period of time\ GAAP is Guidance from a set of rules that have authoritative support\ The United States governmental agency that oversees financial markets and accounting standard-setting bodies Securities and Exchange Commission\ Sarbanes-Oxley Act required a government agency to determine auditing standards and review performance of auditing firms Public Company Accounting Oversight Board (PCAOB)\ Qualities of Financial statements that are imperative to the users are all of these except: US Dollar Based\ Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur\ Cash accounting only records a transaction if cash is paid/received in the time period.
No cash accounting transactions are ignored.\ Which of the following is an Assumption of financial statements? Perodicity, Going Concern, Accrual Basis\ principle dictates that companies record assets at their historical cost principle dictates that companies record assets at their historical cost\ The materiality constraint Relates to a financial statement item's impact on a company's overall financial condition and operations. Size is a big factor.\ Revenues - COGS - Admin Expense = Earnings\ Cash + Inventory + A/R = Current Assets\ Accounts Payable + Short term N/P = Current Liabilities\ Working Capital = current assets – current liabilities\ Net Operating Working Capital = Current assets - Current liabilities - Notes Payable\ Net Operating Working Capital takes into consideration the interest bearing loans. Notes paying interest also have an impact on the financial statements and company performance because of the interest costs. NOWC show what would be leftover to operating with if these loans were paid.\ Earnings
Before Interest and Taxes (EBIT) is the term used to refer to Operating income.\ Revenues - Operating Costs = EBIT (Operating Income)\ CHP.4 Annual report gives information\ Day Sales Outstanding is used to measure the number of days worth of sales that are represented in the accounts receivables. (Receivables / Average Sales per day)\ Inventory Turnover Ratio is used to measure how efficiency the inventory value was used over the course of a period of time. Higher turnover is better. (Cost of Goods Sold / Inventory) \ Fixed Asset Turnover Ratio measures how well a company utilized fixed assets. (Sales / Net Fixed Assets)\ Asset Turnover shows the ability for the company to use total investment in assets. (Sales / total assets)\ Debt to Assets compares the amount of debt to the amount of assets (Total Debt / Total Assets)\ Times Interest Earned Ratio measure how much more operating income than interest that has to be paid. it allows an analyst to determine how much debt or interest the company can truly afford to pay. (Operating income [EBIT] / Interest Expense)\ Profit Margin is the measure of how much of the sales dollars actually becomes profit (net income / sales)\ Return on Assets compares the income against the total assets to see how efficiently the assets were used in producing a profit. (Net Income / Total Assets)\ Operating margin evaluates how well a company can turn sales into operating income. (EBIT / Sales)\ Return on Equity measures how well the value of equity was used to produce a profit (Net Income / Equity)\ Analysts use the Price earnings ratio to compare the most recent annual earnings of a company to its current stock price. (Market Price per Share / Earnings per share)\ Market/Book Ratio compares the current market value to book value of a stock. (Market Price per Share / book value per share)\ A standard created to evaluate performance that can be universal and not dependent upon outside factors is referred to as benchmark\ Companies will often look at performance over time to find indicators. This analysis is called: Trend Analysis\ CHP. 5 When a future value is converted to a present value by reducing it, this is called Discounting
Paul’s Power Tools, Inc. had a Debt ratio of 81%.
Debt Ratio = Total Debt / Total Assets = .81 or 81% Assets = 100% or 1.00 Debt = 81% or .81 Equity = 19% or .19 (Assets = Debt + Equity)
6a. The debt-to-equity ratio for Paul’s Power Tools is _____times.
6a. Debt – Equity Ratio = Total Debt / Total Equity .81/.19 = 4.263157895 4.26 times
6b. The equity multiplier for Paulette's Plants is ________times.
6b. Equity Multiplier = Assets / Equity = 1 + Debt – Equity Ratio
1.0/ .19 = 5.263157895
5.26 times
Wally’s Walkers and Whatnot Products has a profit margin of 9%, sales of $1,000,000, debt of $250,000, total assets of $14,000,000. The ROA for Wally's is ____%
Profit Margin = 9% Profit Margin = Net Income / Sales Sales = 1,000,000 .09 = Net Income / 1,000,000 Net Income = 90,000
ROA = Net Income / Total Assets Net Income = 90,000 Total Assets = 14,000,000 90,000/14,000,000 = .006428571 ROA = .64%
NOM/Annual Percentage Rate, C/Y/Comps/Year, EAR/EFF%
Calculating EAR: Last National Bank charges 13.2 percent compounded monthly on its business loans. First Diversified Bank charges 13.5 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
Calculating APR: Calzon Credit Corp. wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
Easydoesit Life Insurance Company is selling a perpetuity contract that pays a $936 monthly. The contract currently sells for $93,600. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?
Monthly return = ____________% 936/93600= 1.00
APR = _______________% 936/93600= 1.00 x 12 = 12
You receive a credit card application from Chameleon Banks Savings and Loan offering an introductory rate of 2.49 percent per year, compounded monthly for the first six months, increasing thereafter to 16 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?
First 6 months, For next 6 months,
N = 6 N= 6
I/Y = 2.49/12 I/Y = 16/12
PV = -10000 PV = -10125.14763
FV = ? FV = ?
FV = -10125.14763 FV = 10962.64467 Total Interest = 10962.64467– 10000 = 962.64467 Answer: 962.64
•*EPS = Net Income / Outstanding Shares