Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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220 QUESTIONS AND PROBLEMS

b. Quick ratio

c. Inventory turnover ratio

d. Total asset turnover ratio

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Financial Ratio Analysis 221

e. Gross proﬁt margin

f. Operating proﬁt margin

g. Net proﬁt margin

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222 QUESTIONS AND PROBLEMS

h. Debt-to-assets ratio

i. Debt-to-equity ratio

j. Return on assets (basic earning power)

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Financial Ratio Analysis 223

k. Return on equity

l. Number of days of inventory

m. Number of days of credit

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224 QUESTIONS AND PROBLEMS

n. Number of days of purchases

o. Operating cycle

p. Net operating cycle

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Financial Ratio Analysis 225

2. Use the information from problem 1 to answer the follow-

ing: Given the following industry average ratios, what is

Wang’s standing as it emerges from bankruptcy?

Current ratio 2 times

Quick ratio 1 times

Number of days of credit 90 days

Inventory turnover 35 times

Total asset turnover 3 times

Debt-to-equity ratio 45%

Operating proﬁt margin 10%

Net proﬁt margin 7%

Return on assets 9%

Return on equity 11%

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CHAPTER

227

Earnings Analysis

FILL IN THE BLANKS

Refer to Chapter 23, pages 775–796 in Financial Manage-

ment and Analysis.

1. The theory of stock ______________ makes sense. If a

company’s ______________ cash ﬂows could accurately be

______________, then the value of the company’s

______________ today could be determined. Therefore the

______________ could be classiﬁed as ______________- or

______________-valued by the market.

2. ______________ future cash flows is difficult. As an alter-

native, examination of the ______________ and

______________ relation between stock prices and some

fundamental value information, such as ______________

or ______________ is needed. Then, using this relation,

the ______________ of a share of stock can be estimated.

3. Earnings can really mean many different things depending

on the context. If a financial analyst is evaluating the per-

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228 QUESTIONS AND PROBLEMS

formance of a company’s ______________, the focus is on

______________ earnings or earnings before interest and

taxes, (______________). If the analyst is evaluating the

performance of a company ______________, the focus is

on ______________, which is EBIT ______________ inter-

est and taxes. If the analyst is evaluating the performance

of the company from a(n) ______________ perspective, the

earnings are the earnings available to common sharehold-

ers—EBIT less interest, taxes, and ______________ stock

dividends.

4. We often refer to earnings in terms of the ______________

per share of stock, rather than as a total ______________

amount generated in a period. Expressing a company’s net

______________ in terms of income per ______________

allows us to compare it with the company’s ______________

price per share. Earnings per share (______________) is

earnings available for ______________ shareholders, divided

by the number of common shares ______________.

5. ______________ earnings per share are earnings minus

preferred dividends, divided by the average number of

shares outstanding. ______________ earnings per share

are earnings minus preferred dividends, divided by the

number of shares outstanding considering all

______________ securities. Companies that report

______________ per share for any prior period must

______________ these amounts in terms of the new basic

and diluted calculations.

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Earnings Analysis 229

6. The most common financial ratio forecast is

______________ earnings per share of a firm, though projec-

tions of ______________ flows and stock ______________

are available. For most companies whose stock is

______________-traded, there are a number of

______________ who analyze the stock and make fore-

casts regarding earnings in the future. In addition, several

service ______________ collect and report statistics of

analysts’ ______________.

7. The ______________ earnings forecast is the

______________ of the earnings per share for a given

stock. Services that provide analyst forecast information

also provide earnings ______________ analysis, the differ-

ence between ______________ earnings per share and the

______________ earnings per share, where the consensus

forecast is used as the ______________ earnings per share.

8. ______________ earnings forecasts and the forecasts of

______________ analysts are used to compute several mea-

sures that researchers have found to be important factors

in ______________ stock returns such as earnings

______________, or earnings ______________. This is a

measure of consensus earnings ______________ found by

computing the growth in earnings based on actual earn-

ings for the ______________ period and the consensus

earnings forecasts for the ______________ period.

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