University of Illinois, Urbana Champaign - FIN 221

CHAPTER 4

1)What are the operational component(s) of the DuPont Equation?

 

1. profit margin
2. total asset turnover
3. equity multiplier
4. Both A and B

 

 

 

 

2. Which of the following would increase a company's return on equity (all else constant)?

 

1. An increase in the debt ratio.

2. A decrease in the debt ratio.
3. A decrease in the profit margin
4. A decrease in total asset turnover.

 

 

 

 

 

 

3. Under what conditions could a company artificially increase their current ratio at the end of their accounting reporting period by taking out a short term loan and placing the proceeds in the cash account?

 

1. 1. When the current ratio is equal to one before this transaction.
   2. When the current ratio is less than one before this transaction.
   3. When the current ratio is greater than one before this transaction.
   4. The company's current ratio would not increase after this transaction.

 

4. Which of the following ratios might favor a company with older assets vs. a company with newer assets?

 

1. 1. Inventory Turnover
   2. Days Sales Outstanding
   3. Fixed Asset Turnover
   4. Current Ratio

 

5. Which of the following ratios were clearly better for Verizon vs. AT&T in both 2007 and 2006?

 

1. 1. Days Sales Outstanding
   2. Fixed Asset Turnover
   3. Total Asset Turnover
   4. None of the above were better for Verizon both years.

 

6. Which of the following trends would be the biggest sign of decline in a company's debt management situation?

 

1. 1. An increase in both the debt and times-interest earned ratios.
   2. A decrease in the debt ratio and an increase in the times-interest earned ratio.
   3. An increase in the debt ratio and a decrease in the times-interest earned ratio.  
   4. A decrease in the debt ratio.

 

7. What are the operational component(s) of the DuPont Equation?

 

1. 1. profit margin
   2. total asset turnover
   3. equity multiplier
   4. Both A and B

 

8. Which of the following ratios tries to factor out the effect of financing on profitability?

 

1. 1. Return on assets
   2. Profit margin on sales
   3. Return on equity
   4. Basic earning power

 

 

9. Which of the following ratios is equal to profit margin times total asset turnover?

 

1. basic earning power
2. return on assets
3. return on equity
4. equity multiplier

 

 

 

 

10. Which group of financial ratios measure a company's ability to meet short term obligations?

 

1. Liquidity