Exam 16: Option Valuation

An example of a liquidity ratio is ______.

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Lake Somenos Furniture Co.The firm's market to book value for 2001 is ____.

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Alderwood Vineyards,Inc.The firm's current ratio for 2001 is ____.

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Lake Somenos Furniture Co.The firm's leverage ratio for 2001 is _______.

Discuss the differences between economic earnings and accounting earnings.Which is preferred in financial analysis? Which is most widely used,and why?

Over a period of thirty-odd years in managing investment funds,Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value.The average return from using this strategy was approximately _____.

__________ would best explain a situation where the ratio of (net income/total equity)of a firm is higher than the industry average,while the ratio of (net income/total assets)is lower than the industry average.

Mt. Prevost Machine Corp. Income Statement (2001) Sales \ 4,000,000 Cost of goods sold 3,040,000 Gross profit 960,000 Selling and administrative expenses 430,000 Operating profit 530,000 Interest expense 160,000 Income before tax 370,000 Tax expense 148,000 Net income \ 222,000 Balance Sheet 2001 2000 Cash \ 60,000 \ 50,000 Aceounts receivable 550,000 500,000 Inventory 690,000 620,000 Total current assets 1,300,000 1,170,000 Fixed assets 1,300,000 1,230,000 Total assets 2,600,000 2,400,000 Aceounts payable Bank loan 270,000 250,000 Total current liabilities 580,000 500,000 Bonds payable 850,000 750,000 Total liabilities 900,000 1,000,000 Common stock (25,000 shares) 1,750,000 1,750,000 Retained earnings 250,000 250,000 Total liabilities \& equity 600,000 400,000 -Refer to the financial statements of Mt.Prevost Machine Corp.The firm's times interest earned ratio for 2001 is __________.

If the interest rate on debt is higher than ROA,then a firm will __________ by increasing the use of debt in the capital structure.

Mt. Prevost Machine Corp. Income Statement (2001) Sales \ 4,000,000 Cost of goods sold 3,040,000 Gross profit 960,000 Selling and administrative expenses 430,000 Operating profit 530,000 Interest expense 160,000 Income before tax 370,000 Tax expense 148,000 Net income \ 222,000 Balance Sheet 2001 2000 Cash \ 60,000 \ 50,000 Aceounts receivable 550,000 500,000 Inventory 690,000 620,000 Total current assets 1,300,000 1,170,000 Fixed assets 1,300,000 1,230,000 Total assets 2,600,000 2,400,000 Aceounts payable Bank loan 270,000 250,000 Total current liabilities 580,000 500,000 Bonds payable 850,000 750,000 Total liabilities 900,000 1,000,000 Common stock (25,000 shares) 1,750,000 1,750,000 Retained earnings 250,000 250,000 Total liabilities \& equity 600,000 400,000 -Refer to the financial statements of Mt.Prevost Machine Corp.The firm's inventory turnover ratio for 2001 is _______.

Mt. Prevost Machine Corp. Income Statement (2001) Sales \ 4,000,000 Cost of goods sold 3,040,000 Gross profit 960,000 Selling and administrative expenses 430,000 Operating profit 530,000 Interest expense 160,000 Income before tax 370,000 Tax expense 148,000 Net income \ 222,000 Balance Sheet 2001 2000 Cash \ 60,000 \ 50,000 Aceounts receivable 550,000 500,000 Inventory 690,000 620,000 Total current assets 1,300,000 1,170,000 Fixed assets 1,300,000 1,230,000 Total assets 2,600,000 2,400,000 Aceounts payable Bank loan 270,000 250,000 Total current liabilities 580,000 500,000 Bonds payable 850,000 750,000 Total liabilities 900,000 1,000,000 Common stock (25,000 shares) 1,750,000 1,750,000 Retained earnings 250,000 250,000 Total liabilities \& equity 600,000 400,000 -Refer to the financial statements of Mt.Prevost Machine Corp.The firm's return on sales ratio for 2001 is _______.

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities.

__________ best explains a ratio of (sales/average net fixed assets)that exceeds the industry average.

Given the results of the study by Clayman,you would __________ the stocks of firms with high ROEs and __________ the stocks of firms with low ROEs.

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Lake Somenos Furniture Co.The firm's current ratio for 2001 is ____.

Assuming continued inflation,a firm that uses LIFO will tend to have a(n)________ current ratio than a firm using FIFO,and the difference will tend to __________ as time passes.

The duPont system decomposes ROE into the following components:

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Alderwood Vineyards,Inc.The firm's return on sales ratio for 2001 is __________ percent.

To create a common size balance sheet ____________ all items on the balance sheet by __________.

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Alderwood Vineyards,Inc.The firm's average collection period for 2001 is _________.