Chapter 14 - Company Analysis (Done)

Question 1

What are the four main types of financial ratios discussed?

Answer 1

The four main types of financial ratios are liquidity ratios, risk analysis ratios, operating performance ratios, and value ratios.

Question 2

What do liquidity ratios measure?

Answer 2

Liquidity ratios measure a company’s ability to meet its short-term commitments or debt.

Question 3

Which ratios are included under liquidity ratios?

Answer 3

The working capital ratio and the quick ratio (also known as the current ratio or acid test) are included under liquidity ratios.

Question 4

How is the working capital ratio calculated?

Answer 4

The working capital ratio is calculated as current assets divided by current liabilities.

Question 5

How is the quick ratio different from the working capital ratio?

Answer 5

The quick ratio is calculated as current assets minus inventory, divided by current liabilities, focusing on assets that can be quickly converted to cash.

Question 6

What do risk analysis ratios show?

Answer 6

Risk analysis ratios show how well a company can deal with its debt obligations.

Question 7

Which ratios are included under risk analysis ratios?

Answer 7

The asset coverage ratio, debt-to-equity ratio, cash flow to total debt outstanding ratio, and interest coverage ratio are included under risk analysis ratios.

Question 8

How is the asset coverage ratio calculated?

Answer 8

[Tangible Assets - (Current Liabilities- Short Term Debts)] / Total Debt

Question 9

What does the debt-to-equity ratio indicate?

Answer 9

The debt-to-equity ratio indicates the proportion of borrowed funds to equity, with a lower ratio being preferable.

Question 10

How is the interest coverage ratio calculated?

Answer 10

The interest coverage ratio is calculated as earnings before interest and taxes (EBIT) divided by interest charges.

Question 11

What do operating performance ratios illustrate?

Answer 11

Operating performance ratios illustrate how well management is utilizing the company’s resources to generate profits.

Question 12

Which ratios are included under operating performance ratios?

Answer 12

The gross profit margin, net profit margin, return on common equity, and inventory turnover ratio are included under operating performance ratios.

Question 13

How is the gross profit margin calculated?

Answer 13

The gross profit margin is calculated as gross profit divided by revenue.

Question 14

How is the net profit margin calculated?

Answer 14

The net profit margin is calculated as profit less the share of profit of associates, divided by revenue.

Question 15

What does the return on common equity show?

Answer 15

The return on common equity shows the dollar amount of earnings produced for each dollar invested by common shareholders.

Question 16

How does the inventory turnover ratio help in company analysis?

Answer 16

The inventory turnover ratio helps in company analysis by showing how efficiently a company is managing its inventory. A higher turnover ratio indicates efficient inventory management and strong sales.

Question 17

What do value ratios show investors?

Answer 17

Value ratios show investors the worth of a company’s shares or the return on owning them.

Question 18

Which ratios are included under value ratios?

Answer 18

The percentage dividend payout ratio, earnings per share, dividend yield, equity value per common share, and price-to-earnings (P/E) ratio are included under value ratios.

Question 19

How is the earnings per share ratio calculated?

Answer 19

The earnings per share ratio is calculated as profit divided by total common shares outstanding.

Question 20

How is the price-to-earnings (P/E) ratio calculated?

Answer 20

The P/E ratio is calculated as the market price per share divided by earnings per share, indicating how much an investor is willing to pay per dollar of earnings.

Question 21

What does the equity value per common share indicate?

Answer 21

The equity value per common share indicates the value of a company’s equity allocated to each outstanding common share, providing insight into the company’s worth per share.

Question 22

What is the difference between the dividend payout ratio and the dividend yield?

Answer 22

The dividend payout ratio measures the percentage of profits paid out as dividends to shareholders, while the dividend yield calculates the annual dividend per share divided by the current market price of the stock.

Question 23

What does a high cash flow to total debt outstanding ratio indicate?

Answer 23

A high cash flow to total debt outstanding ratio indicates that a company has strong internal cash generation capabilities, making it better able to repay its debt.

Question 24

What is the Dividend Discount Model (DDM)?

Answer 24

The DDM relates a stock’s current price to the present value of all expected future dividends, helping determine the intrinsic value of a stock.

Question 25

How is the intrinsic value of a stock calculated using the DDM?

Answer 25

The intrinsic value is calculated as the current year dividend times (1 + growth rate), divided by the rate of return minus the growth rate.

Question 26

What can the DDM help determine about a stock?

Answer 26

The DDM can help determine if a stock is undervalued or overvalued based on its intrinsic value.