Multiple Choice Questions
1. Which of the following ratios best measures the profitability of a company?
A. Return on equity
B. Gross margin
C. Current ratio
D. Net operating asset turnover
2. Which of the following statements is correct?
A. Net operating profit margin divided by net operating asset turnover equals return on net
operating assets.
B. Return on net operating assets can be disaggregated into net operating profit margin and
leverage.
C. Return on equity equals return on net operating assets less interest, net of tax.
D. Return on equity can be disaggregated into net operating profit margin, net operating asset
turnover and leverage.
3. Which of the following could explain a decrease in net operating asset turnover for a company?
A. Switching from straight line to accelerated depreciation for financial reporting purposes
B. An increase in the financial leverage of the company
C. Addition of a new plant for production purposes
D. Decrease cost of production inputs
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4. Which of the following could cause return on net operating assets to increase, all other things
equal?
A. A decrease in interest rate on debt
B. Increase in days accounts receivable are outstanding
C. Increase in inventory turnover
D. Decrease in gross margin
5. When calculating return on net operating assets, interest expense net of tax is added back to net
income for purposes of calculating the numerator. What tax rate should be used?
A. Estate tax rate
B. Marginal tax rate
C. Statutory federal tax rate
D. Statutory federal tax rate plus statutory state tax rate
6. Which of the following will increase the sustainable equity growth of a company, all other things
equal?
A. Increase dividend payout
B. Pay suppliers more quickly
C. Pay suppliers more slowly
D. Decrease dividend payout
7. Which of the following will cause an increase in net operating income (NOPAT)?
A. Increase in the return on net operating assets
B. Decrease in the return on net operating assets
C. No change in the return on net operating assets
D. There is not sufficient information
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8. Which of the following would explain an observed decrease in return on equity, all else equal?
A. Decrease in tax rate
B. Increase in interest rate on debt
C. Stock split
D. Stock dividend
9. Return on operating assets is a measure of which of the following?
A. Profitability
B. Efficiency
C. Solvency
D. Liquidity
10. Cost of goods sold divided by inventory provides information about:
A. profitability.
B. capital structure.
C. management of working capital.
D. gross profit margin.
11. Purchases divided by accounts payable provides information about:
A. capital structure.
B. management of working capital.
C. gross profit margin.
D. profitability.
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12. Which of the following situations is most likely to explain an accounts receivable turnover that is
lower than the industry norm?
A. The company makes less credit sales than industry.
B. The company gives customers less time to pay than its competitors.
C. The company has been selling inferior products to competitors.
D. The company is systematically under-estimating bad debts.
13. Which of the following situations is most likely to explain a net operating asset turnover that is
higher than the industry norm?
A. The company has more recently purchased fixed assets.
B. The company uses FIFO while competitors use LIFO.
C. The company uses the accelerated depreciation method while competitors use the straight line
method.
D. The company purchases more credit supplies than competitors.
True / False Questions
14. An analysis of a company's performance requires joint analysis of net income in relation to the
invested capital.
True
False
15. There is only one way to measure invested capital.
True
False
16. A company that operates in a highly competitive industry with low barriers to entry is likely to have
low net operating profit margins compared to companies that operate in less competitive
industries.
True
False
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17. Companies that have low net operating profit margins generally only earn a reasonable return on
net operating assets if they can utilize their net operating assets very efficiently.
True
False
18. The two components of RNOA, net operating profit margin and NOA turnover, are independent of
each other.
True
False
19. If a company has rapidly growing earnings per share, their return on net operating assets must be
increasing too.
True
False
20. When calculating return on equity minority, interest is added to the numerator as it has been
deducted in arriving at net income.
True
False
21. When calculating return on net operating assets, deferred taxes should be deducted from the
denominator.
True
False
22. Return on equity is the return stockholders have realized during the past year.
True
False
23. The relation between a company's return on common equity (ROCE) and return on net operating
assets (RNOA) reveals information about the company's success with financial leverage.
True
False
24. A decrease in net operating profit margin will cause both return on net operating assets and return
on equity to decrease, all other things being equal.
True
False
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25. Return on net operating assets will always be greater than or equal to the pretax return on equity.
True
False
26. When calculating return on total equity, it is normal to add back preferred dividends to net income.
True
False
27. It is possible to have an increasing return on net operating assets while net operating profit margin
is decreasing.
True
False
28. Return on invested capital is a better measure of profitability than earnings as earnings numbers
fail to reflect the capital needed to generate those earnings.
True
False
29. If two companies both increase their net income by 25% over the prior year this means they have
both been equally profitable this year.
True
False
30. When calculating return on net operating assets it may be necessary to adjust assets to reflect the
fact that not all assets are operating assets.
True
False
31. If future expected return on common stockholders' equity is less than expected required return by
equity holders then the market value of a company's stock should be less than book value.
True
False
32. Sustainable equity growth rate is a function of return on common stockholders' equity and the
dividend payout ratio.
True
False
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33. Return on equity can be expressed as return on net operating assets multiplied by leverage (net
operating assets/equity) and by earnings leverage.
True
False
34. The accounting-based stock valuation formula calculates the value of a stock as the book value of
the net operating assets plus the present value of future expected dividends discounted at the cost
of equity.
True
False
35. When calculating return on net operating assets, the numerator is net income plus minority
interest.
True
False
36. Return on net operating assets is a better measure of operating performance than return on
equity, as it is independent of the form of financing.
True
False
37. It is possible to have increasing earnings growth while having decreasing return on net operating
assets.
True
False
38. It is possible to assess the common equity growth rate by analyzing the retention of earnings.
True
False
39. An advantage of leverage that benefits common stockholders is successful trading on the equity.
True
False
40. Financial statements of a diversified company should be analyzed by segments.
True
False
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41. Practice considers a segment significant if its sales, operating income (or loss), or identifiable
assets are 30% or more of the combined amounts of all the company's operating assets.
True
False
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