Q3

  1. An analyst gathered the following data for a company: 2003 Return on Equity = 19.8% 2004 Return on Equity = 20.0% 2005 Return on Equity = 22.0% 2003 Return on total asset = 8.1% 2004 Return on total asset = 8.0% 2005 Return on total asset = 7.9% 2003 Total Asset Turnover = 2.0 2004 Total Asset Turnover = 2.0 2005 Total Asset Turnover = 2.1 Based on the information above, the most appropriate conclusion is that, over the period 2003 to 2005, the company’s A) net profit margin and financial leverage have decreased B) net profit margin and financial leverage have increased C) net profit margin has decreased and financial leverage has increased. 2) Company data info as follows: 2005 ROE = 18.90% 2005 Tax Burden = 0.70 2005 Interest Burden = 0.90 EBIT Margin = 10.00% Asset Turnover = 1.50 Leverage = 2.00 2004 ROE = 18.90% 2004 Tax Burden = 0.75 2004 Interest Burden = 0.90 EBIT Margin = 10.00% Asset Turnover = 1.40 Leverage = 2.00 Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition? A) Profitability and the liquidity position both improved in 2005 B) The higher average tax rate in 2005 offset the improvement in profitability, leaving ROE unchanged. C) The higher average tax rate in 2005 offset the improvement in efficiency, leaving ROE unchanged.

B C Not to sure.

c c

c c

correct answers: C C