(5) Because a firm that uses debt can be as profitable as a firm that does...
(5) Because a firm that uses debt can be as profitable as a firm that does not, some financial ratios are calculated t with NOPAT (Net Operating Profit After Tax) rather than with net income. [7 marks]
[1] True or False? (42 points)
(6) In ROC (return on capital) calculations, if the operating earnings corresponds to profits obtained during 2017, then the debt and equity values must be at end of 2017. [7 marks]
(7) ROA (return on assets) ca n be estimated by multiplying the operating profit margin by the asset turnover ratio. [7 marks]
Homework Answers
Answer (5)
True
Explanation:
There are financial ratios for profitability measurement like ROIC (Return on Invested capital) which is based on NOPAT.
ROIC = NOPAT / Operating capital
Gross Profit margin is another measure which will remain same whether firm that uses debt or not.
Gross Profit Margin = Gross Profit / Sales
Answer (6):
True
Explanation:
To calculate ROC if the operating earnings correspond to profits obtained during 2017, then the debt and equity values must be at end of 2017. The numerator and denominator have to be in sync in terms of time period to which it relates.
Answer (7):
True
Explanation:
ROA = Operating Profit or Net Income / Average Assets
Can also be expressed as
= Operating Profit or Net Income /Sales * Sales / Average Assets
= Operating profit margin * Asset turnover ratio
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