Question

[1] True or False? (1) Luxury goods companies have low asset turnover ratios and high operating profit margins. [7 marks] (2) In project valuation, one of the advantages of the Payback rule is that it provides a simple way to communicate an idea of project profitability. [7 marks] (3) Equity investors are satisfied with the performance of a company when the cost of equity is higher than ROE (return on equity)7 marks] (4) For Company A, the receivables turnover ratio increased in 2017 with respect to 2017. Therefore, its average collection period also increased in that period. [7 marks] (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] (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]

Answer 1

Q1 is True. Luxury goods are sold in lesser amount but at higher price hence they have low turnover ratio( Total Sales/Assets) . Since the prices are higher hence the operating profits are higher.

Q2 is true Simple payback period is easy to calculate

Q3. False When ROE is less than Cost of Equity the equity holders tend to lose value and get reduced returns

Q4. False. Average collection period=365/Assets Turnover . Higher the turnover ratio lower is the Average collection period.