41. A firm computes ROA, profit margin for ROA, and total assets turnover for each segment using the segment disclosures. The amounts for these ratios computed at a segment level differ from those at a corporate level for which of the following reason(s)?
A. The numerator of ROA at a firm-wide level includes all revenues and expenses except interest expense net of taxes, whereas the numerator of ROA using the segment data includes operating revenues and expenses only.
B. The denominator of ROA at a firm-wide level is the average of assets at the beginning and end of the year, whereas total assets at the end of the year are used in computing segment ROAs.
C. The denominator of ROA at a firm-wide level is the total assets at the end of the year, whereas the average of assets at the beginning and end of the year, are used in computing segment ROAs.
D. choices a and b
E. choices a and c
42. The calculation of Rate of Return on Common Shareholders’ Equity (ROCE) is as follows:
Rate of Return on Common = Shareholders’ Equity
A. Net Income - Dividends on Preferred Stock
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Ending Common Shareholders’ Equity
B. Net Income
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Average Common Shareholders’ Equity
C. Net Income + Dividends on Preferred Stock
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Average Common Shareholders’ Equity
D. Net Income - Dividends on Preferred Stock
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Average Common Shareholders’ Equity
E. Net Income + Dividends on Preferred Stock
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Ending Common Shareholders’ Equity
43. The capital provided by common shareholders during the period include(s):
A. the average par value of common stock.
B. capital contributed in excess of par value on common stock.
C. retained earnings.
D. other common shareholders’ equity accounts.
E. all of the above.
44. The capital provided by common shareholders during the period used for calculating the return on common equity equals
A. the average par value of common stock, capital contributed in excess of par value on common stock, retained earnings, and any other common shareholders’ equity accounts for the period.
B. average preferred shareholders’ equity less average total shareholders’ equity.
C. the ending par value of common stock, capital contributed in excess of par value on common stock, retained earnings, and any other common shareholders’ equity accounts for the period.
D. ending preferred shareholders’ equity less ending total shareholders’ equity.
E. choices a and b
45. ROCE will exceed ROA whenever ROA exceeds the after-tax cost of borrowing plus any dividends required for preferred shareholders. Which of the following is/are true?
A. The bond holders earn a higher return, but they undertook more risk in their investment.
B. The preferred shareholders earn a lower return, but they undertook more risk than the common shareholders in their investment.
C. The common shareholders earn a higher return, but they undertook more risk in their investment.
D. Using lower-cost borrowed funds and then earning a rate of return on those funds higher than their cost increases the return to the common shareholders.
E. Choices c and d.
46. ROCE disaggregates into the following components:
A. Profit Margin for ROCE Ratio x Inventory Turnover Ratio x Debt Ratio
B. Profit Margin for ROCE Ratio x Total Assets Turnover Ratio x Debt Ratio
C. Profit Margin for ROCE Ratio x Inventory Turnover Ratio x Capital Structure Leverage Ratio
D. Profit Margin for ROCE Ratio x Total Assets Turnover Ratio x Capital Structure Leverage Ratio
E. Profit Margin x Total Assets Turnover Ratio x Debt Ratio
47. The term _____ describes financing with debt and preferred stock to increase the potential return to the residual common shareholders’ equity.
A. trading on the debt
B. trading on the equity
C. financial leverage
D. equity financing
E. none of the above
48. The capital structure leverage ratio indicates
A. the sales generated from each dollar of assets.
B. the portion of the sales dollar left over for the common shareholders after covering all operating costs and subtracting claims of creditors and preferred shareholders.
C. the portion of the sales dollar left over for the preferred shareholders after covering all operating costs and subtracting claims of creditors and common shareholders.
D. the proportion of total assets, or total financing, provided by common shareholders contrasted with the financing provided by creditors and preferred shareholders.
E. the proportion of total assets, or total financing, provided by preferred shareholders contrasted with the financing provided by creditors and common shareholders.
49. The higher the capital structure leverage ratio, the _____ is the proportion of financing that common shareholders provide and the _____ is the proportion that creditors and preferred shareholders provide. Thus, the _____ the capital structure leverage ratio, the _____ is financial leverage.
A. higher; lower; higher; higher
B. lower; higher; higher; higher
C. higher; lower; higher; lower
D. lower; higher; higher; lower
E. lower; higher; lower; lower
50. If the rate of return on assets for the year is 15%, a general interpretation of the ratio would be
A. the assets generated $0.15 cash per dollar of cash invested.
B. 15% of the assets produced income while the remainder were at break-even for the year.
C. before payment for use of capital, $0.15 was earned for each dollar of assets used by the company.
D. dividends of $0.15 per share were paid.
E. before payment for use of capital, $0.15 was earned for each dollar of cash used by the company.