FI 393 Lecture Notes - Lecture 16: Reserve Requirement, Quick Ratio, Current Liability
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Explain how the ratios help identify the strengths and weaknesses of the facility and the management team.
The students will use Financial Ratios to analyze a potential strategic acquisition.
The student will use the Financial Ratios to evaluate the current management team’s ablity to make good long term and short term decisions. Should Acme continue to employ the current management team. If Beechtree is acquired, do we keep its management team or do build a new one
Ratio | Formula | Standard | Beechtree |
Current Ratio (Liquidity) | Current Assets/Current Liabilities | 1.3 | 1.15 |
Quick Ratio (liquidity) | (Current Assets-Supplies on hand)/Current Liabilities | 1.2 | .9 |
Days Cash on Hand (liquidity) | (Cash on Hand +Market Securities)/((Tot Operating Exp-Depreciation Exp)/365) | 50 | 35 |
Days in Net Receivable (liquidity) | (Accounts Receivable +Notes Receivable + Other Receivable-allowance for uncollectable)/(Tot Operating Revenue/365) | 49 | 65 |
Debt Service Coverage Ratio (solvency) | Net Operating Income/(Principal +interest + lease payment | >1 | .89 |
Operating Margin (profitability) | Operating Income/Total Operating Revenue | >.05 | -.005 |
Return on Total Assets (profitability) | Net Operating Income/Total Assets | 1.1 | .9 |
Net Operating Income for this financial statement=Decrease in unrestricted net assets + Interest Expense + Depreciation
Problem 3-6
Du Pont Analysis
Gardial & Son has an ROA of 9%, a 3% profit margin, and a return on equity equal to 13%.
What is the company's total assets turnover? Round your answer to two decimal places.
What is the firm's equity multiplier? Round your answer to two decimal places.
Current and Quick Ratios
Ace Industries has current assets equal to $7 million. The company's current ratio is 2.5, and its quick ratio is 2.0.
What is the firm's level of current liabilities? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000
$
What is the firm's level of inventories? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000
$
Problem 3-8
Profit Margin and Debt Ratio
Assume you are given the following relationships for the Haslam Corporation:
Sales/total assets | 1.9 |
Return on assets (ROA) | 3% |
Return on equity (ROE) | 9% |
Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.
%
Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.
%
Problem 3-9
Current and Quick Ratios
The Nelson Company has $1,650,000 in current assets and $550,000 in current liabilities. Its initial inventory level is $330,000, and it will raise funds as additional notes payable and use them to increase inventory.
How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.3? Round your answer to the nearest cent.
$
What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.
Problem 3-10
Times-Interest-Earned Ratio
The Morris Corporation has $850,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $3.4 million, its average tax rate is 40%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.
QUESTION 1
Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
a. | $6,000,000 | |
b. | $3,000,000 | |
c. | $2,000,000 | |
d. | $1,000,000 |
8.3 points
QUESTION 2
What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
a. | 2.65 | |
b. | 2.1 | |
c. | 1.1 | |
d. | 1.2 |
8.3 points
QUESTION 3
A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
a. | $20,000 | |
b. | $ 5,000 | |
c. | $10,000 | |
d. | $15,000 |
8.3 points
QUESTION 4
If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must
a. | increase its equity multiplier | |
b. | increase sales and increase assets | |
c. | decrease its equity multiplier | |
d. | reduce sales and increase assets |
8.3 points
QUESTION 5
The sales-to-inventory ratio:
a. | is technically inferior to other commonly used ratios. | |
b. | is superior to the inventory turnover ratio. | |
c. | as a determination of financial performance, is good comparison tool. | |
d. | was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole. |
8.5 points
QUESTION 6
Primary sources of comparative financial data include
a. | Dun and Bradstreet | |
b. | Richard Moore, Inc. | |
c. | Framingham Financial Library | |
d. | New York Times |
8.3 points
QUESTION 7
____ indicate the ability of the firm to meet its short-term financial obligations
a. | Leverage ratios | |
b. | Profitability ratios | |
c. | Activity ratios | |
d. | Liquidity ratios |
8.3 points
QUESTION 8
If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
a. | on total assets as a percentage of long-term liabilities. | |
b. | on cost of goods sold as a percentage of sales. | |
c. | on taxes paid as a percentage of stockholders’ equity. | |
d. | on expenses as a percentage of current assets. |
8.3 points
QUESTION 9
The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.
a. | payout | |
b. | earnings | |
c. | return on earnings | |
d. | dividend yield |
8.3 points
QUESTION 10
The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:
a. | based on the company's accounting information system (AIS) | |
b. | constructed in conformity with generally accepted accounting principles | |
c. | developed using management's choice of accounting enhancement techniques | |
d. | an accurate picture of the company's market position |
8.3 points
QUESTION 11
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
a. | liquidity | |
b. | profitability | |
c. | size | |
d. | risk |
8.3 points
QUESTION 12
The type of ratio that indicates the firm’s ability to provide adequate returns in the form of dividends and share price appreciation is:
a. | Profitability ratios | |
b. | Asset management ratios | |
c. | Financial leverage management ratios | |
d. | Liquidity ratios |
8.5 points
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