Financial Management: Asset Effectiveness & Efficiency & Working Capital Management

Question 1

Return on Investment ROI Formula

Answer 1

Income/ Investment Capital
Investment Capital (D+E)
OR
Investment Capital = Net Income/ Avg. Assets

Question 2

Return on Total Assets Ratio

Answer 2

Net Income/ Average total assets

Question 3

Debt-to Asset ratio

Answer 3

Total Debts/ Total assets

Question 4

Debt to Equity Ratio

Answer 4

Total Debt/ Total Shareholder’s Equity

Question 5

Definition of Net Working Capital

Answer 5

CA-CL

Question 6

Current Ratio

Answer 6

Current Assets/ Current Liabilities

Question 7

Quick Ratio

Answer 7

Cash + MS+ A/R / CL

Question 8

APR of quick payment discount

Answer 8

(360/Pay Period- Discount Period) X (Discount/100-Discount %)

Question 9

Cash Conversion Cycle

Answer 9

ICP+ RCP- PDP

Question 10

Inventory Turnover

Answer 10

Cogs/Average Inventory

Question 11

Inventory Conversion Period (ICP)

Answer 11

365/ Inventory Turnover

Question 12

A/R Turnover

Answer 12

Sales/ Avg. A/R

Question 13

Receivable Conversion Period (RCP)

Answer 13

365/ A/R Turnover

Question 14

A/P Turnover

Answer 14

COGS/ Average A/P

Question 15

AP Deferral Period

Answer 15

365/ AP Turnover

Question 16

Reorder Point

Answer 16

Safety Stock + (Lead Time X Sales during lead time)

Question 17

Economic Order Quantity

Answer 17

(2X Annual Sales Order X Order Cost )/ Carrying cost per unit

Question 18

Return on Investment *2nd type of formula)

Answer 18

Profit Margin X Investment turnover

Question 19

ROI

Answer 19

is ideal performance measure for investment in strategic business units

Question 20

Return on Assets

Answer 20

Net Income/ Average Total Assets

Question 21

Limitations of Return on Investment

Answer 21

• Residual Income may be superior
• inadvertently focus managers purelt on maximizing short-term returns
• Disincentive to Invest ( Takes time for asset to produce sales)

Question 22

Return on Equity

Answer 22

Net Income/ Total Equity

Question 23

ROE Goal

Answer 23

ROE> Cost of Equity (CAPM)

Question 24

Net Profit Margin is a measure of operating efficiency

Answer 24

Net Income/ Sales

Question 25

Asset Turnover is a measure of the degree of efficiency with which a company is using its assets

Answer 25

Sales/Avg. Total Assets

Question 26

Financial Leverage amplifies both risk assumed and potential return

Answer 26

FL= Avg. Total Assets/ Equity | -Must be within risk appetite

Question 27

Residual Income and Economic Value Added in dollars for investors

Answer 27

RI =Net Income (i/S) - Required Return $ Required return= Net Book Value X Hurdle Rate Net Book Value of Equity = Assets - Liab.

Question 28

Calculating DuPoint ROE

Answer 28

Net Profit Margin X Asset Turnover X Financial Leverage NI/S X Sales/Avg Total Assets X Avg. TA/ Equity

Question 29

Extended DuPoint Model

Answer 29

Net Profit Margin into 3 distinct components. Net Income/Sales a) Tax Burden: Net Income/ Pre-tax Income b) Interest Burden: Pretax Income/ EBIT c) Operating Income Margin= EBIT/Sales

Question 30

Benefits of Residual Income Performance Measures

Answer 30

a) Realistic Target Rates In dollars | b) Focus on Target Return and Amount

Question 31

Weakness of Residual Income Performance Measures

Answer 31

a) Reduces Comparability | b) Target Rates Require Judgement

Question 32

Economic Value Added EVA is WACC The hurdle rate is WACC

Answer 32

EVA uses NOPAT

Question 33

NOPAT

Answer 33

Profit before interest but after tax

Question 34

EVA =

Answer 34

NOPAT- $WACC Investment = D+E NOPAT - Required Return EBITX(1-T)

Question 35

Residual Income

Answer 35

Looks at the return available to the stockholder

Question 36

EVA

Answer 36

Looks at the return to all providers of capital

Question 37

Positive EVA means

Answer 37

Performance is meeting standards. | Stock value is going to go up

Question 38

Negative EVA means

Answer 38

Not meeting standards | Stock is going to go down.

Question 39

Debt- to Asset Ratio Interpretation

Answer 39

Ratio indicates a long term debt paying ability. The lower the ratio, the better protection afforded to creditors

Question 40

Debt-to- Equity Ratio Interpretation

Answer 40

the lower the ratio, the lower the risk involved

Question 41

When it comes to carrying inventory

Answer 41

The lower the cost of inventory, the more companies are willing to carry.

Question 42

Determination of Safety Stock depends on the following factors

Answer 42

1) Reliability of sales forecasts 2) Possibility of customer dissatisfaction resulting from back orders 3) Cost of running out of inventory 4) Lead time 5) Seasonal demands on inventory

Question 43

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers

Answer 43

ROI may lead to rejecting projects that yield positive cash flows

Question 44

The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its:

Answer 44

Income in excess of a desired minimum amount

Question 45

The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the

Answer 45

Historical weighted average cost of capital for the company.