Financial Analysis & Decision Making Flashcards

A company's quick ratio is 0.8. What does this indicate?

Answer: The company may struggle to meet short-term obligations without selling inventory

A quick ratio below 1.0 means current liabilities exceed liquid assets (excluding inventory), signaling potential short-term liquidity risk.

Which capital budgeting technique accounts for the time value of money AND provides a dollar-value measure of added shareholder wealth?

Answer: Net Present Value

NPV discounts future cash flows to present value and directly measures the dollar amount of value created, making it the preferred capital budgeting method.

A firm has EBIT of $500,000, interest expense of $100,000, and taxes of $120,000. What is net income?

Answer: $280,000

Net income = EBIT − Interest − Taxes = $500,000 − $100,000 − $120,000 = $280,000.

In sensitivity analysis, what is a 'tornado chart' used for?

Answer: Ranking input variables by their impact on the output

A tornado chart ranks variables from most to least influential on an outcome, helping managers focus on the assumptions that matter most.

Which ratio best measures how efficiently a company collects its receivables?

Answer: Days Sales Outstanding (DSO)

DSO measures the average number of days it takes to collect payment after a sale, directly reflecting receivables collection efficiency.

A company issues $1,000,000 in bonds at a coupon rate of 6% when market interest rates are 8%. The bonds will sell at:

Answer: A discount below par

When market rates exceed the coupon rate, investors demand a lower price (discount) to achieve the higher market yield.

What does a high asset turnover ratio indicate about a company?

Answer: Efficient use of assets to generate revenue

Asset turnover (Revenue ÷ Total Assets) measures how effectively a firm uses its assets to generate sales; a higher ratio indicates greater efficiency.