BEC Deck 6-Financial Management Cont'

Question 1

Operation Activity Ratios-

Answer 1

Measure the efficiency with which a firm carries out its operating activities.

Question 2

Accts’ Receivable Turnover-

Answer 2

Measures the # of times that accounts receivable turnover (are incurred & collected) during a period. Indicates the quality of credit policies & the efficiency of collection procedures. Computed as:
(Net) Credit Sales / Average (Net) Accts Receivable

Question 3

of days’ sales in average receivables-

Answer 3

Measures the avg # of days required to collect receivables. It is a measure of the avg age of receivables. Computed as:
300 or 360 or 365 / Accts Receivable Turnover

Question 4

Inventory Turnover-

Answer 4

Measures the # of times that inventory turns over during a period. Computed as:
Cost of Goods Sold / Avg Inventory

Question 5

of days’ supply in inventory-

Answer 5

Measure the # of days inventory is held before it is sold or used. Computed as:
300 or 360 or 365 / Inventory Turnover

Question 6

Accts Payable Turnover-

Answer 6

Measures the # of times that accts payable turnover during a period. Computed as:
Credit Purchases / Avg Accts Payable or
(COGS+End Inventory-Beg Inv) / Avg Accts Payable

Question 7

of days’ Purchases in Avg Payables-

Answer 7

Measures the avg # of days required to pay accts payable. Computed as:
300 or 360 or 365 / Accts Payable Turnover

Question 8

Capital Turnover-

Answer 8

Measures how well the # of times that the average owners’ equity is represented by sales during a period.
Computed as: Annual Sales / Avg Owners’ Equity

Question 9

Cash Conversion Cycle (CCC)=

Answer 9

CCC=Inventory Conversion Cycle + Accts Receivable Cycle - Accts Payable Conversion Cycle or
CCC= Operating Cycle - Accts Payable Conversion Cycle

Question 10

Profitability Ratios-

Answer 10

Measure aspects of a firm’s operating results on a relative basis.

Question 11

Gross Profit-

Answer 11

Sales (or Revenue) - Cost of Goods Sold

Question 12

Gross Profit Margin-

Answer 12

Gross Profit / (Net) Sales

Question 13

(Net) Profit Margin (on sales)-

Answer 13

Net Income / (Net) Sales

Question 14

Return on total assets or return on investment-

Answer 14

Net Income + (add back) Interest Expense / Avg total assets or avg total investment

Question 15

Return on owners’ (all stockholders) equity-

Answer 15

Net Income / Avg Stockholders’ Equity

Question 16

Return on common stockholders’ equity-

Answer 16

Net Income - Preferred Dividend (obligation for the period only) / Avg Common Stockholders Equity

Question 17

Required Return-

Answer 17

Avg Invested Capital x Hurdle Rate

Question 18

Residual Income-

Answer 18

Net Income - Required Return

Question 19

Economic Value Added (EVA)-

Answer 19

Earnings before interest - [(Opportunity Cost) x (LT debt + Shareholders Equity)]

Question 20

Earning Per Share (EPS)-

Answer 20

Net Income - Preferred Dividends (obligation for period only) / Weighted Avg # of shares outstanding

Question 21

Price Earnings Ration (P/E ration)-

Answer 21

Market price for a common share / Earning per (common) share

Question 22

Common Stock dividends payout rate-

Answer 22

Total Basis:
=Cash Dividends to Commons Shareholders / Net Income to Common shareholders
Per Share Basis:
=Cash Dividends per Common Share / Earning Per Common Share

Question 23

Common Stock Yield-

Answer 23

Dividend per Common Share / Market Price per Common Share

Question 24

Equity/Investment Leverage Ratios-

Answer 24

Provide measures of relative sources of equity and equity value.

Question 25

Debit to Equity Ratio-

Answer 25

Total Liabilities / Total Shareholders Equity

Question 26

Owners’ Equity Ratio-

Answer 26

Shareholders’ Equity / Total Assets

Question 27

Debt Ratio-

Answer 27

Total Liabilities / Total Assets

Question 28

Book Value per Common Stock-

Answer 28

Common Shareholders’ Equity / # of outstanding Common shares

Question 29

Book Value per Preferred Share-

Answer 29

Preferred Shareholders’ Equity (including dividends in arrears) / # of Outstanding Preferred Stock

Question 30

Diversifiable Risk (also called Unsystematic, Firm-Specific or Company-Unique)-

Answer 30

The portion or elements of risk that can be eliminated through diversification of investments.

Question 31

Nondiversifiable Risk (also called Systematic or Market-Related)-

Answer 31

The portion or elements of risk that cannot be eliminated through diversification of investments.