Question

Chapter 14 Practice Test Question 16 13 Ratios Using the firm's data provided below explain why the firm's ROA is less than the industry average of 59% given that the industry average asset turnover is 1.22 4 points $150 (mil) 70 15 $125 30 $ 35 Sales Skipped EBIT Interest Expense Assets Equity еВоok Net Profit Print Multiple Choice References The firm uses less debt than the industry. The firm is not generating enough sales from assets and has too much debt. The firm is not generating enough sales from assets and has too high operating costs The firm has too high an interest burden ratio.

Answer 1

13.
Correct answer is option C.
The firm is not generating enough sales from assets and has too high operating costs.

ROA of Company is = Net income/Total Assets
= 35/125
= 28%

Had there been no interest expense then ROA would have been 50/125 = 40%

But still industry average is 59%. This shows there is a shortfall of (59%-40%) which can be only due to high operating expense.

Sales Turnover = Sales/Assets = 150/125 = 1.20
This shows that The company is not able to generate enough sales as this value is below 1.22.

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