FINA 3000 UGA - EXAM 1 STUDY GUIDE QUESTIONS WITH
COMPLETE SOLUTIONS
What are the 2 liquidity ratios? -- Answer ✔✔ current ratio and quick ratio
What is current ratio? -- Answer ✔✔ Current ratio is a measure of cash inflow (current
assets turning into cash) versus cash outflow (upcoming current liabilities)
What is quick ratio? -- Answer ✔✔ Since inventories are the least liquid of a firm's
assets, quick ratio addresses the issue with current ratio by assuming that the firm
doesn't sell an inventory in the upcoming period
What is market to book? -- Answer ✔✔ Market to book ratio measures the market
value of firm's common equity to the book value of its common equity (how does the
market view our common equity?)
Market to book is equal to Market Capitalization divided by shareholder equity
Market capitalization is given by multiplying current stock price to outstanding shares
What is gross margin? -- Answer ✔✔ Gross margin shows the gross profit per dollar of
sales
Gross profit is sales revenue minus cost of goods sold
What is operating margin? -- Answer ✔✔ Operating profit margin captures the impact
of gross profit margin plus non-production expenses
Operating profit is gross profit minus all overhead expenses (depreciation, selling and
administrative costs, research and development)
, What is net margin? -- Answer ✔✔ Net profit margin is the income created for firm
owners from each dollar of sales
What is TIE? -- Answer ✔✔ TIE stands for Times Interest Earned. It measures the
relationship between operating profit and interest.
What are the two forms of profitability? -- Answer ✔✔ ROE and ROA
What is ROE? -- Answer ✔✔ ROE stands for return on shareholder equity and
measures the net income earned for every dollar of shareholder equity
What is ROA? -- Answer ✔✔ ROA stands for return on assets and refers to the net
income earned for every dollar of asset
What is debt-equity ratio? -- Answer ✔✔ The percentage of debt used in the firm's
capital structure.
As ratio increases, leverage increases.
As leverage increases, more risk and expected return.
What is price earnings ratio? -- Answer ✔✔ Price earnings ratio shows how the market
values the future of a company.
The higher the price earnings ratio, the greater potential growth
What are 6 efficiency ratios that measures speed and days? -- Answer ✔✔ Speed:
1. Accounts receivable turnover
2. Inventory turnover
3. Accounts payable turnover
Days:
4. Collections
5. Days held in inventory
6. Days payable
COMPLETE SOLUTIONS
What are the 2 liquidity ratios? -- Answer ✔✔ current ratio and quick ratio
What is current ratio? -- Answer ✔✔ Current ratio is a measure of cash inflow (current
assets turning into cash) versus cash outflow (upcoming current liabilities)
What is quick ratio? -- Answer ✔✔ Since inventories are the least liquid of a firm's
assets, quick ratio addresses the issue with current ratio by assuming that the firm
doesn't sell an inventory in the upcoming period
What is market to book? -- Answer ✔✔ Market to book ratio measures the market
value of firm's common equity to the book value of its common equity (how does the
market view our common equity?)
Market to book is equal to Market Capitalization divided by shareholder equity
Market capitalization is given by multiplying current stock price to outstanding shares
What is gross margin? -- Answer ✔✔ Gross margin shows the gross profit per dollar of
sales
Gross profit is sales revenue minus cost of goods sold
What is operating margin? -- Answer ✔✔ Operating profit margin captures the impact
of gross profit margin plus non-production expenses
Operating profit is gross profit minus all overhead expenses (depreciation, selling and
administrative costs, research and development)
, What is net margin? -- Answer ✔✔ Net profit margin is the income created for firm
owners from each dollar of sales
What is TIE? -- Answer ✔✔ TIE stands for Times Interest Earned. It measures the
relationship between operating profit and interest.
What are the two forms of profitability? -- Answer ✔✔ ROE and ROA
What is ROE? -- Answer ✔✔ ROE stands for return on shareholder equity and
measures the net income earned for every dollar of shareholder equity
What is ROA? -- Answer ✔✔ ROA stands for return on assets and refers to the net
income earned for every dollar of asset
What is debt-equity ratio? -- Answer ✔✔ The percentage of debt used in the firm's
capital structure.
As ratio increases, leverage increases.
As leverage increases, more risk and expected return.
What is price earnings ratio? -- Answer ✔✔ Price earnings ratio shows how the market
values the future of a company.
The higher the price earnings ratio, the greater potential growth
What are 6 efficiency ratios that measures speed and days? -- Answer ✔✔ Speed:
1. Accounts receivable turnover
2. Inventory turnover
3. Accounts payable turnover
Days:
4. Collections
5. Days held in inventory
6. Days payable
