Chapter 5

Question 1

To assess the efficiency of a firm’s investment management, an analyst would analyze the firm’s
A. NOPAT margin
B. Operating asset turnover
C. Financial spread
D. Financial leverage

Answer 1

b

Question 2

To assess the efficiency of a firm’s operating management, an analyst would analyze the firm’s
A. NOPAT margin
B. Operating asset turnover
C. Financial spread
D. Financial leverage

Answer 2

a

Question 3

One difference between the traditional and the alternative approach to decomposing return on equity is that
A. The traditional approach defines leverage as debt-to-equity, whereas the alternative approach defines leverage as assets-to-equity.
B. Only the traditional approach explicitly shows the impact of financial spread on return on equity.
C. The approaches use different definitions of profit margins and asset turnover.
D. One approach uses beginning-of-year balance sheet items to calculate ratios, whereas the other approach uses end-of-year balance sheet items.

Answer 3

c