# FSA Q!!!

Why the compnay uses cash to retire notes payable will lead to increase the asset turnover??? anyone pls advise me, thanks!!!

ok you can do this- tell me what the formula is first. we’ll go from there.

asset turnover = sals / asset

ok good. now- you are retiring notes payable with cash. notes payable is what? a liability cash is an asset so go back to the basic A - L = E this formula will get you far in life you’re going to pay off that liability but you’re going to do so by using cashola. what’s affected in the ratio? is sales? is assets? hint, it’s assets- which way? now you tell me…

and one more question, when other things being equal, two compnayies have substantially different dividend payout ratios. after several yearas, the company with the lower dividend payout ratio is most likely to have: a) lower inventory turnover b)higher inventory turnoer c)less rapid growth of earnings per share d)more rapid growth of earnings per share P/E = (D/E)/r-g (D/E) = divident payout ratio g= (1-dividend payout ratio)*ROE so numerator is smaller and denominator is larger due to g is bigger so why the answer is C but D, is there anything i missed? thanks,!

bannisja Wrote: ------------------------------------------------------- > ok good. now- you are retiring notes payable > with cash. > > notes payable is what? a liability > cash is an asset > > so go back to the basic A - L = E > this formula will get you far in life > > you’re going to pay off that liability but you’re > going to do so by using cashola. > > what’s affected in the ratio? > is sales? > is assets? hint, it’s assets- which way? > > now you tell me… asset decreases??? coz u use cash to payoff the liability???

yes on the assets down b/c you use cash to pay off the liability. so assets down, liabilities down. your S/A up. as for your 2nd one, i haven’t looked at that stuff in a while (i’m on the L2 board, just hopped down b/c it’s close to test time and i know there are tons o questions that need to get answered before d-day)… i want to say it’s going to have something to do with the fact they said “after several years” maybe? short run i’m with you, since higher retention rate, bigger g… maybe some kind of diminishing returns on the \$\$ you plow back into the co (taking on not as high NPV type projects, etc)? i dunno, i’m reaching, hopefully you have a solution manual that will guide your way on that one. good luck on the test- relax- and just keep your stuff nice and simple. know those ratios and just work them nice and slow- if they give you some moving part, just work it out in the numerator and denominator and see what moves.

Wait. Are you saying the answer listed was not C) less rapid growth and not d) more rapid growth? I don’t see how the company with higher reinvestment would have lower growth.

mcf Wrote: ------------------------------------------------------- > Wait. Are you saying the answer listed was not C) > less rapid growth and not d) more rapid growth? > > I don’t see how the company with higher > reinvestment would have lower growth. sorry a typo error the answer is D. Why??

gingerduck Wrote: ------------------------------------------------------- > Why the compnay uses cash to retire notes payable > will lead to increase the asset turnover??? > > anyone pls advise me, thanks!!! cash is a current asset and gets reduced. my question is this: is note payable a current liab or fixed? current, right?

current so let’s say they tell you your current ratio starting out was ABOVE 1 (they love these q’s by the way). did this transaction increase or decrease your current ratio?

D is the answer on the EPS growth because, if you have a lower amount of your total earnings going to dividends, it means you have a larger amount of retained earnings with which to fund value generating investment projects (projects for which you will earn a positive NPV thereby creating shareholder value and increasing the size of the firm). The more funding available, the larger the array of potential investments for you to pick from, through which you will see faster EPS growth. If you paid out more in dividends, shareholders would receive value, but the firm would fail to grow.

gingerduck Wrote: ------------------------------------------------------- > mcf Wrote: > -------------------------------------------------- > ----- > > Wait. Are you saying the answer listed was not > C) > > less rapid growth and not d) more rapid growth? > > > > I don’t see how the company with higher > > reinvestment would have lower growth. > > sorry a typo error the answer is D. Why?? Because grwoth rate = ROE * retained earning ratio Lower div payout ratio causes higher retained ratio, thus higher growth rate.

bannisja Wrote: ------------------------------------------------------- > current > > so let’s say they tell you your current ratio > starting out was ABOVE 1 (they love these q’s by > the way). > > did this transaction increase or decrease your > current ratio? still increase CR?

you sound unsure- when in doubt on ratios, plug and play with numbers. i said your ratio was over 1. so let’s say CA = 2, CL = 1, your current ratio = 2. let’s say what the liability you’re retiring is worth .5 what’s your new ratio?

CR=4

Bannisja just made a good point to keep in mind (and the CFA loves to trick on this). … plug and play to see how ratios change, but be wary of the evil ‘1’ threshold. Ratios less than 1 and greater than 1 react differently to changes in the numerator and denominator in terms of increases and decreases.

you drop cash by .5 so 2 - .5 = 1.5 you also drop your liabilities by .5 because you’re retiring that note payable with the cash, so 1 - .5 new ratio 1.5/.5 = 3 is what i get anyways. so you were right, current ratio does go up… just trying to show you don’t necessarily need to memorize all that much- if you know your formula, you can work with it to see how the ratios move. g’night- good luck, crush it on 6/7.

Thanks a lot…!!!

mcf- no tricks- just work it out- you’ll nail it every time. this test won’t kill you on the calculator, but it will ask 2 part questions like this all day long- perfect q would be "a company retires a note payable with cash. if it’s current ratio is greater than 1, what affect does it have on asset turnover ratio and CR? and then it’ll have the four increase/increase, increase/decrease, etc. choices. so as a tip studying your FSA- you can’t avoid knowing formulas, you have to know them. but as for memorizing which way stuff moves, if you know the formula and you always keep your A - L = E equation balanced, you’ll be in very good shape on test day. keep at it guys- FSA will make or break you on L1- do not let up for a second. it’s go time.