Finance Ratios and Cash Flows Quiz
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Questions and Answers

What does the operating profit margin measure?

  • Net income as a percentage of net sales revenue
  • Company's profitability in relation to total assets
  • Shareholder's equity as a percentage of total assets
  • Operating income as a percentage of net sales revenue (correct)

    • The price/earnings (P/E) ratio shows how much profit a company generates for each dollar of equity investment.

    False

    What is the return on equity (ROE)?

    A financial ratio measuring a company's profitability in relation to its shareholders' equity.

    The _____ measures a company's market value relative to its book value.

    <p>market/book (M/B) ratio</p> Signup and view all the answers

    Match the following financial ratios with their definitions:

    <p>Operating Profit Margin = Measures operating income as a percentage of net sales revenue Net Profit Margin = Measures net income as a percentage of net sales revenue Earnings per Share (EPS) = Measures profitability on a per-share basis Return on Total Assets (ROTA) = Measures profitability in relation to total assets</p> Signup and view all the answers

    Which ratio indicates how much profit a company generates for each dollar of assets it owns?

    <p>Return on Total Assets (ROTA)</p> Signup and view all the answers

    Depreciation is considered a cash expense that reflects the cash outflow of an asset's value reduction.

    <p>False</p> Signup and view all the answers

    What do operating cash flows represent?

    <p>Cash inflows and outflows related to a company's core business operations.</p> Signup and view all the answers

    Which of the following is included in the calculation of Operating Cash Flows?

    <p>Net Income</p> Signup and view all the answers

    A perpetuity is a financial product that ends after a certain period.

    <p>False</p> Signup and view all the answers

    What is meant by free cash flow (FCF)?

    <p>The amount of cash generated after accounting for capital expenditures necessary to maintain and expand a business.</p> Signup and view all the answers

    Discounting cash flows helps determine whether an investment is worthwhile based on future cash flows and the ________ rate.

    <p>discount</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Annuity = A financial product providing payments over time Yield to Maturity = Total expected return from a bond when held until maturity Interest Rate Risk = Risk that changes in interest rates will affect bond's value Present Value = Estimation of how much a future cash flow is worth now</p> Signup and view all the answers

    What do investment cash flows represent?

    <p>Cash inflows and outflows related to long-term assets</p> Signup and view all the answers

    The yield curve depicts the relationship between bond yield and stock performance.

    <p>False</p> Signup and view all the answers

    What is the basic valuation model for bonds?

    <p>Calculating the present value of the bond's future cash flows, including interest payments and principal repayment.</p> Signup and view all the answers

    What is a semiannual coupon?

    <p>A coupon payment paid twice a year</p> Signup and view all the answers

    The cost of capital represents the maximum return that investors expect to earn from an investment in a company.

    <p>False</p> Signup and view all the answers

    What type of investor is a venture capitalist?

    <p>A private equity investor</p> Signup and view all the answers

    Dividends may be paid in cash, stock, property, or _____.

    <p>scrip</p> Signup and view all the answers

    Which of the following describes IPOs?

    <p>The first sale of a company's stock to the public</p> Signup and view all the answers

    Match the following terms with their appropriate descriptions:

    <p>Semiannual coupon = Payment made twice a year on a bond Venture capital = Investment in startups with high-growth potential Dividends = Distribution of a company's earnings to shareholders IPO = First sale of stock to the public</p> Signup and view all the answers

    A stock dividend is cash distributed to shareholders.

    <p>False</p> Signup and view all the answers

    What does the constant-growth model assume about dividend payments?

    <p>That they will grow at a constant rate indefinitely</p> Signup and view all the answers

    What does WACC stand for?

    <p>Weighted Average Cost of Capital</p> Signup and view all the answers

    A positive NPV indicates that an investment is expected to generate returns less than the required rate of return.

    <p>False</p> Signup and view all the answers

    What is the formula to calculate the payback period?

    <p>Initial investment divided by expected annual cash inflows</p> Signup and view all the answers

    The ____ costs are costs that have already been incurred and cannot be recovered.

    <p>sunk</p> Signup and view all the answers

    What does IRR evaluate?

    <p>The profitability of an investment</p> Signup and view all the answers

    Incremental cash flows refer to cash that is lost when a project is undertaken.

    <p>False</p> Signup and view all the answers

    Before or after which factor can relevant cash flows be calculated?

    <p>taxes</p> Signup and view all the answers

    Which of the following is a characteristic of debt but not equity?

    <p>Maturity</p> Signup and view all the answers

    The capital markets are primarily concerned with the trading of short-term financial instruments.

    <p>False</p> Signup and view all the answers

    What does the income statement report over a specific period?

    <p>revenues, expenses, and net income or loss</p> Signup and view all the answers

    The ratio that measures a company's ability to pay its short-term obligations with its most liquid assets is known as the ______.

    <p>quick ratio</p> Signup and view all the answers

    What is the primary purpose of the statement of cash flows?

    <p>To show cash inflows and outflows</p> Signup and view all the answers

    Match the financial ratio with its description:

    <p>Current Ratio = Measures ability to pay short-term obligations Debt Ratio = Proportion of total assets financed by debt Times Interest Earned Ratio = Ability to meet interest payments Operating Profit Margin = Profitability measure based on operating income</p> Signup and view all the answers

    The balance sheet provides a summary of a company's financial position over a specified accounting period.

    <p>False</p> Signup and view all the answers

    What is the quick ratio also known as?

    <p>acid-test ratio</p> Signup and view all the answers

    What does financial leverage primarily refer to?

    <p>Utilizing borrowed funds to finance operations</p> Signup and view all the answers

    Total leverage includes both operating leverage and financial leverage.

    <p>True</p> Signup and view all the answers

    What does payout policy refer to?

    <p>The way a company uses its profits to pay dividends or repurchase shares.</p> Signup and view all the answers

    Current assets include cash and other assets expected to be converted to cash within one year, such as ______.

    <p>accounts receivable</p> Signup and view all the answers

    What is net working capital?

    <p>Current assets minus current liabilities</p> Signup and view all the answers

    The cost of giving up a cash discount on payables is the additional interest paid for delayed payments.

    <p>True</p> Signup and view all the answers

    Define current liabilities.

    <p>Obligations expected to be settled within the next 12 months.</p> Signup and view all the answers

    Study Notes

    Differences Between Debt and Equity

    • Voice in management: Equity holders have a say, debt holders do not
    • Claims on income and assets: Equity is subordinate to debt
    • Maturity: Debt has a predetermined maturity, equity does not
    • Tax treatment: Debt interest is deductible, equity dividends are not

    Money Market vs. Capital Markets

    • Money Market: Short-term financial instruments (Treasury bills, commercial paper, certificates of deposit) are traded.
    • Capital Markets: Long-term instruments (stocks, bonds) are traded, facilitating long-term capital raising for companies, governments, etc.

    Income Statement

    • Reports a company's revenue, expenses, and net income/loss over a period (quarter or year)

    Balance Sheet

    • A snapshot of a company's financial position at a specific point in time
    • Shows assets, liabilities, and equity, and how they are financed

    Statement of Cash Flows

    • Shows inflows and outflows of cash and cash equivalents over a specific period (usually a quarter or a year)

    Current Ratio

    • Measures a company's ability to pay short-term obligations with current assets.

    Quick Ratio

    • Measures a company's ability to pay short-term obligations with its most liquid assets (excluding inventory).

    Debt Ratio

    • Measures the proportion of a company's total assets financed by debt.

    Times Interest Earned Ratio

    • Measures a company's ability to meet interest payments on outstanding debt.

    Operating Profit Margin

    • Measures a company's operating income as a percentage of net sales revenue

    Net Profit Margin

    • Measures a company's net income as a percentage of net sales revenue

    Earnings Per Share (EPS)

    • Company's profitability on a per-share basis

    Return on Total Assets (ROTA)

    • Profitability related to total assets

    Return on Equity (ROE)

    • Profitability related to shareholders' equity

    Price/Earnings (P/E) Ratio

    • Measures company stock price relative to earnings per share

    Market/Book (M/B) Ratio

    • Measures a company's market value relative to its book value

    Depreciation

    • Non-cash expense representing asset value reduction over time (wear and tear, obsolescence).

    Statement of Cash Flows

    • Operating Flows: Cash flows related to core business
    • Investment Flows: Cash flows related to long-term assets
    • Financing Flows: Cash flows related to financing activities

    Free Cash Flow (FCF)

    • Cash a company generates after capital expenditures.

    Annuities

    • Series of payments over a specified period

    Perpetuities

    • Stream of cash payments that continues forever

    Present Value (PV)

    • Estimation of future cash flows' current worth.

    Discounted Cash Flow (DCF) Valuation

    • Determines investment worth based on future cash flows

    Yield to Maturity (YTM)

    • Total expected return if a bond is held until maturity

    Bonds

    • Debt securities representing loans (typically to corporations or governments).
    • Valuation Model: Calculates present value of future cash flows (interest payments and principal)
    • Interest Rate Risk: Risk of bond value changes due to interest rate fluctuations

    Shares (Equity)

    • Equity: Amount of money a company's owner has put in or owns.
    • Dividends: Potentially payable periodically to shareholders at the company's discretion

    Venture Capital

    • Money invested in startups with high-growth potential.

    Business Angels

    • Private investors providing capital to businesses

    IPO (Initial Public Offering)

    • Company selling stock to the public for the first time.

    Constant-Growth Model

    • Valuation method for stock based on expected future, constant dividend growth

    Cost of Capital

    • Minimum return investors expect from a company investment.

    Weighted Average Cost of Capital (WACC)

    • Average cost of all capital raised (considering the proportion of different capital sources).

    Payback Method

    • Time it takes an investment to recover its initial cost, calculated by dividing the initial investment by expected annual cash inflow.

    Net Present Value (NPV)

    • Measures investment profitability by calculating the present value of expected future cash flows minus initial investment
    • Positive NPV = profitable
    • Negative NPV = not profitable

    Incremental Cash Flows

    • Cash flow a company gains by starting a new project.

    Internal Rate of Return (IRR)

    • Estimates the potential profitability of an investment.

    Sunk Costs

    • Costs already incurred and unrecoverable, regardless of the decision.

    Opportunity Costs

    • Benefits/opportunities forgone due to a specific choice.

    Operating Leverage

    • Point where a company starts making profits after covering all costs.

    Financial Leverage

    • Use of borrowed funds to increase returns.

    Total Leverage

    • Combination of operating/financial leverage influencing earnings per share and return on equity.

    Payout Policy

    • How a company distributes profits (dividends or share repurchases).

    Stock Dividend

    • Dividend paid in additional shares instead of cash.

    Current Assets

    • Assets expected to be converted to cash within a year. (cash, receivables, inventory)

    Current Liabilities

    • Obligations due within one year (accounts payable, wages payable, taxes payable)

    Net Working Capital

    • Difference between current assets and current liabilities.

    Cash Conversion Cycle (CCC)

    • Time for converting inventory investments into cash from sales.

    Seasonal/Permanent Funding Requirements

    • Investments in operating assets based on sales patterns

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    Description

    Test your knowledge on key financial ratios and cash flow concepts. This quiz covers topics such as operating profit margin, return on equity, and free cash flow. Perfect for students studying finance or professionals brushing up on essential financial metrics.

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