Chapter 4

Question 1

price/earnings ratio

Answer 1

price per share/earnings per share

Question 2

ratio analysis used by three main groups

Answer 2

(1) managers
(2) credit analysts
(3) stock analysts

Question 3

analysis of firm’s ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition

Answer 3

trend analysis

Question 4

return on total assets

Answer 4

net income/total assets

Question 5

one that trades in an active market and thus be quickly converted to cash at the going market price

Answer 5

liquid assets

Question 6

ratio that indicates the ability of firm assets to generate operating income

Answer 6

BEP ratio

Question 7

market/book ratio

Answer 7

common equity/outstanding shares

Question 8

fixed asset turnover ratio

Answer 8

sales/net fixed asset

Question 9

basic earning power ratio (BEP)

Answer 9

EBIT/Total Assets

Question 10

ratio that bring in the stock price and give us an idea of what investors think about the firm and its future prospects

Answer 10

market value ratios

Question 11

quick/acid test, ratio

Answer 11

(current assets - inventories) / current liabilities

Question 12

ratio that gives an idea how profitably the firms is operating and utilizing its assets

Answer 12

profitability ratio

Question 13

profitability ratios

Answer 13

1. operating margin
2. profit margin
3. return on total assets
4. basic earning power ratio
   5, return on common equity

Question 14

group of ratios that show the combined effects of liquidity, asset management, and debt on operating results

Answer 14

profitability ratios

Question 15

days sales outstanding

Answer 15

receivables / (annual sales/365)

Question 16

ratio that relate the firms stock price to its earnings and book value per share

Answer 16

market value ratios

Question 17

ratio that gives an idea of the firm’s ability to pay off debts that are maturing within a year

Answer 17

liquidity ratio

Question 18

measures operating incoem, or EBIT, per dollar of sales

Answer 18

operating margin

Question 19

ratio that gives an idea of how efficiently the firm is using its assets

Answer 19

asset management ratio

Question 20

current ratio

Answer 20

current assets/current liabilities

Question 21

set of ratios that measure how effectively a firm is managing its assets

Answer 21

asset management ratio

Question 22

techniques employed by firm to make their financial statements look better than they really are

Answer 22

window dressing technique

Question 23

times-interest-earned ratio

Answer 23

EBIT/interest charges

Question 24

economic value added

Answer 24

EBIT (1-corporate tax rate) - (total investor’s capital) (after-tax cost of capital)

Question 25

inventory turnover ratio

Answer 25

sales/inventories

Question 26

ratio that gives an idea of how the firm has financed its assets as well as the firm’s ability to repay its long-term debt

Answer 26

debt management ratio

Question 27

indicates the average length of time the firm must wait after making a sale before it receives its cash

Answer 27

days sales outstanding (dso)

Question 28

Return on Common Equity (ROE)

Answer 28

Net Income/Common Equity

Question 29

ratios that measure how effectively a firm manages its debt

Answer 29

debt management ratio

Question 30

profit margin

Answer 30

net income/sales

Question 31

dupont equation

Answer 31

profit margin x total assets turnover x equity multiplier

Question 32

5 categories of ratios

Answer 32

1. Liquidity Ratio
2. Asset Management ratio
3. Debt management ratio
4. Profitability ratio
5. Market value ratios

Question 33

debt ratio

Answer 33

total debt/total assets

Question 34

process of comparing a particular company with a set of benchmark companies

Answer 34

benchmarking

Question 35

total asset turnover ratio

Answer 35

sales/total assets

Question 36

indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future

Answer 36

current ratio

Question 37

operating margin

Answer 37

operating income (EBIT) / sales

Question 38

a measure of firm’s ability to meet its annual interest payments

Answer 38

times-interest-earned (TIE) ratio