- If gross profits rise, operating profits are flat, and capital spending declines in 2005, which of the following ratios is most likely to rise? A) Inventory turnover. B) Financial leverage. C) Return on equity. D) Return on assets. 2. Which of the following statements about the EVA calculated in the previous question is least accurate? (In the last question the EVA was positive. - TG) A) Even though the EVA figure is positive this does not necessarily mean that management has added value during the last year. B) A firm will generate a positive EVA if its operating revenues exceed its operating expenses and capital costs. C) Economic measures of profitability such as EVA are more appropriate for the analyst to use in assessing the firm’s profitability than accounting measures like ROE. D) Firms that invest in negative net present value (NPV) projects destroy value and generate negative EVA. T/G
i’ll throw up a tired B, A?
Q1. FL = B? Q2. A? A = wrong B,C,D = correct
A and A
- The correct answer was A) Inventory turnover. If gross profits rise and operating profits are flat, the likely reasons are either higher sales or lower cost of goods sold (COGS) with the most likely being an increase in sales greater than an increase in COGS. Higher sales would most likely lead to an increase in inventory turnover due to a related increase in COGS or lower average inventory on hand. Flat profits and minimal investment in new assets are likely to limit the growth of ROE and ROA. Without increases in the asset base or decreases in equity, financial leverage is not likely to rise. 2. The correct answer was A) Even though the EVA figure is positive this does not necessarily mean that management has added value during the last year. A positive EVA does mean the firm was successful at creating economic profits and did add value by investing in positive NPV projects thereby developing a sustainable competitive advantage. T/G
i think A should be the answer for the first question because COGS is high and capital expenditures are small -> inventory is low
mwvt, you are rocking!!!
ohh shucks, how could FL increase bloody!! I am going crazy. I went into all the DOL, DFL and stuff and selected B. Overanalyzed ITO = S/I I --> DECREASE ITO should INCCREASE damm!
maratikus Wrote: ------------------------------------------------------- > mwvt, you are rocking!!! HEATING UP!!
How is COGS high? If its high wouldn’t we have a low gross profit? And also how can we say inventory is low?
I’m with you prob. I would think that if gross profit is increasing but operating profit is flat, a very possible explanation for that would be increasing interest expense, Im thinking along your lines Dinesh and am thinking about DFL.