Question

1. Return on Assets measures a firm's:

a. profitable use of its assets    b. use of financial leverage

c. return on shareholders investment d. profitability of sales

e. cost effectiveness of its operating activities

2. The Current ratio of a firm is 1.3, If the firm uses cash to pay short-term notes-payable, would the transaction increase or decrease the current ratio and Return on Asset ratio?

3. Which of the following could cause return on equity to increase, all other things equal

a. increase in days sale in inventory    b.increase in total assets

c.increase in taxes paid    d. decrease in equity

e. increase of cost of goods sold

4.Which of the following could cause return on assets to decrease, all other things equal.

a.decrease in cost of goods sold    b. decrease in fixed assets

c. increase in inventory turnover    d. decrease in days sales in receivables

e. increase in days sales in inventory

5. using the information for the firm follows:

Assets/Equity: 1.44    Profit Margin: 14%    Sales/Assets: .86    Tax Rate: 39%

Return on Equity for the firm would be?

Answer 1

1. Return on Assets measures a firm's:

a. profitable use of its assets

Return on Assets = Net Income/Average Operating Assets

2. The Current ratio of a firm is 1.3, If the firm uses cash to pay short-term notes-payable, would the transaction increase or decrease the current ratio and Return on Asset ratio?

DECREASE, since assets have reduced

3.d. decrease in equity

Return on Equity = Net Income/Equity

4.b. decrease in fixed assets

Return on Assets = Net Income/Average Assets

5.Return on Equity = Net Income/Equity

= Profit Margin*Sales/Assets*Assets/Equity

= 14%*0.86*1.44

= 17.3376%