Exam 8: Return on Invested Capital and Profitability Analysis

Cost of goods sold divided by inventory provides information about (choose one answer):

Financial statements of a diversified company should be analyzed by segments.

When calculating return on net operating assets it may be necessary to adjust assets to reflect the fact that not all assets are operating assets.

The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's success with financial leverage.

An advantage of leverage that benefits common stockholders is successful trading on the equity.

There is only one way to measure invested capital.

Which of the following is the best measure of operating efficiency?

Return on invested capital is a better measure of profitability than earnings as earnings numbers fail to reflect the capital needed to generate those earnings.

An analysis of a company's performance requires joint analysis of net income in relation to the invested capital.

If a company has rapidly growing earnings per share, their return on net operating assets must be increasing too.

The accounting-based stock valuation formula calculates the value of a stock as the book value of the net operating assets plus the present value of future expected dividends discounted at the cost of equity.

Selected information for Acme Corp.: Year 1 Cash 1,000 Marketable securities 8,000 Occounts receivable-net 2,000 Other current assets 2,500 Property, plant and equipment 4,500 Less: accumulated depreciation (4,000) Gess: accumulated depreciation 5,000 Year 2 Year 3 1,500 1,500 2,000 2,000 3,000 2,500 3,000 3,000 6,000 7,000 (4,200) (4,400) 7,500 1,000 -When calculating Acme's return on net operating assets in Year 2, which of the following adjustments to the asset base is most appropriate to consider?

A decrease in net operating profit margin will cause both return on net operating assets and return on equity to decrease, all other things being equal.

If Yutter's dividend payout ratio increased to 50% after year 1 then:

Operating assets \ 10,500 \ 10,000 Short-term debt 1,000 1,000 Long-term debt 3,500 3,000 Minority interest 500 450 Common equity 5,500 5,000 Operating income 1,350 Interest expense 350 Tax expense (40\%) 400 Minority interest 50 Net income 550 -Return on operating assets for 2005 is:

Sustainable equity growth rate is a function of return on common stockholders' equity and the dividend payout ratio.

When calculating return on equity minority interest is added to the numerator as it has been deducted in arriving at net income.

The two components of RNOA, net operating profit margin and NOA turnover, are independent of each other.

When calculating return on net operating assets, interest expense net of tax is added back to net income for purposes of calculating the numerator. What tax rate should be used?

When calculating return on net operating assets, the numerator is net income plus minority interest.