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7.12: Chapters 5 - Review Questions
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Calculate as many financial ratios as you can using the company from the last problem set. Average your data where advised.
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For each ratio, provide some written commentary and analysis.
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See how many ratios from each of our six categories you know already by rote memory.
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Liquidity
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Solvency
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Profitability
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Turnover
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Return
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Market Ratios
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How are the Liquidity and Solvency ratio categories different from one another?
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Why do we use 360 in calculating the Average Collection Period (
ACP
)? Under what rationale may 365 days be advised?
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In the
ACP
, why are Credit Sales, in most cases, larger than Accounts Receivable?
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Why do we use EBIT, and not Net Income, in calculating the Return-on-Assets?
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Why don’t we utilize the accountant’s net worth figure as a metric for company value?
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How do Price/Earnings and Price-to-Book ratios illustrate a company’s value?
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Define “Longitudinal” and “Cross-sectional.” How can you use these concepts in your company analysis?
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What is the end-goal of Ratio Analysis?
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How is it that a strong company, e.g., Walmart, operates with negative Working Capital? What is
your
view?
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What benefits does the Aging Schedule provide?
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What is the relationship between a Debt-to-Total Assets ratio and a company’s Times Interest Earned ratio?
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What industries tend to have great amounts of Debt relative to Assets? How do they manage to accomplish this without increasing their default risk?
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What benefit might there be to using the Debt-to-Assets rather than the more popular Debt-to-Equity ratio?
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Is a low
TIE
Ratio always a bad thing? Under what circumstances might a company tolerate a low ratio?
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Have you figured out yet whether ratios provide answers?
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What two key pieces of information does the DuPont Model focus on?
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In what technical, ratio-ways, are “Growth” and “Value” stocks different from one another?
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What is meant by “signaling”?
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What is meant by a “Liquidity Premium”?
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Provide some reasons why two companies, which are identical in all respects, might have radically different Turnover ratios?
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List and discuss some limitations of financial ratios?
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After all this, can you “handle the truth”?