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Chapter 3 Financial Policies

Terms in this set (41)

Which of the following are traditional financial ratio categories?
*Profitability Ratios
*Market Value Ratios
*Asset Management Ratios
If a firm increases its debt-to-equity ratio, it will ... its sustainable growth ratio
increase
Financial analysis uses EBITDA over EBIT because it adds back ... and ... and is thus a better measure of pretax operating cash flows
amortization & depreciation expenses
Financial Statements report:
book values
Enterprise value is the sum of a firm's market capitalization and the ... value of its interest-bearing debt ... any cash on hand
market; less
The P/E ratio is a ... ratio
market value
EBITDA is a measure of ... operating cash flow
pre-tax
The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ... and those that do not
sales
In the percentage of sales approach to financial planning, it is assumed that any surplus funds
are used to pay off debt
Which two groups are most interested in liquidity ratios?
Short-term creditors (bankers, suppliers)
A times interest earned ratio of 3.5 means that a firm has ... that is(are) 3.5 times greater than the firm's interest expense
earnings before interest & taxes
Based on the sustainable growth rate, what are factors that affect a firm's ability to sustain growth?
*Financial Policy
*Dividend Policy
*Profit Margin
Which ratios use information that is not contained in financial statements?
Market Value ratios
What are traditional financial ratio categories?
*Profitability Ratios
*Market Value Ratios
*Asset Management Ratios
If a firm maintains a constant debt-equity ratio and dividend payout ratio, and does not use any new external equity financing, the firm can grow at a rate no greater than its
sustainable growth rate
The sustainable growth rate is...
the maximum rate of growth a firm can maintain without increasing its financial leverage
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be
less than 1
According to the DuPont Identity, which factors can influence ROE?
*Financial Leverage
*Asset Use Efficiency
*Operating Efficiency
In a financial plan, how is the amount of borrowing determined?
By management's D/E decision
The ... identity can help to explain why two firms with the same return on equity may not be operating in the same way
DuPont
A ... P/E ratio may indicate that investors believe a company has better prospects for the future growth in earnings
high
The standardized statements used for the purpose of comparing the financial statements of different companies are called
common-size statements
Profitability measures such as ROA & ROE are ... rates of return
accounting
In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?
Additional working capital and fixed assets are needed to support growth
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Non-cash expenses
A financial planning model incorporates what?
*The asset turnover rate
*The firm's dividend policy
*The firm's use of financial leverage
What are some of the most apt tendencies to create problems when comparing financial statements for multiple firms?
*Differing fiscal years
*Differing accounting methods
*Seasonality
... financial statements provide for comparison of firms that differ in size
Standardized
The cash coverage ratio adds ... to operating earnings (EBIT) for a better measure of how much cash is available to meet interest obligations
depreciation & amortization
The information needed to compute profit margin can be found on the ...
income statement
If a company has inventory, the quick ratio will always be ... than the current ratio
less than
The enterprise value multiple allows for comparing the value of firms with different ... structures
capital
Which of the following statements is most likely correct for a firm with days' sales in receivables of 30 days?
The firm finances approximately 8% of its annual sales at any given time
A use of cash...
increases assets, decreases liabilities & equity
A source of cash
Decreases in assets, increase in liabilities or equity
Differences between positive & negative EFN:
*positive EFN represents a deficit, uses of cash > sources of cash

*negative EFN represents a surplus, uses of cash < sources of cash
EFN is equal to...
New Trial Assets - New Trial Liabilities & Equity
EFN Surplus Excel Plug
if(Plug<0,-plug,0)
EFN Deficit Excel Plug
if(Plug>0,plug,0)
Trial Assets
Current Assets + Fixed Assets
Trial Liabilities & Equity
Includes everything except EFN
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