Question

1 Which one of the following is not a desirable component that causes ROE to increase?

a) Lower gross margin

b) Higher equity multiplier

c) Higher current ratio

d) Lower total asset turnover

e) Higher profit margin

2 CLF, a steel producer in the US, has a current ratio of 3.5 and a quick ratio of 3.2. This indicates that:

a) inventory represents a small percentage of the firm's current assets.

b) current assets represent more than 50 percent of total assets.

c) the firm buys inventory on credit.

d) the firm has more current liabilities than it does current assets.

e) cash is the largest component of current assets.

3 Higher percentage of long term assets in intangible assets and goodwill will lead to:

a) a decrease in the inventory turnover rate

b) a higher fixed asset turnover ratio than total asset turnover ratio.

c) an increase in the current ratio.

d) an increase in depreciation expenses.

e) lower fixed asset turnover ratio than total asset turnover ratio.

Answer 1

1. a) Lower Gross Margins

Lower gross margins do not generally cause an increase in Return on Equity.

2. a) inventory represents a small percentage of the firm's current assets.

Since Current ratio = Current Assets/Current Liabilities and quick ratio = (Current Assets - Inventory)/Current Liabilities,

it is obvious that a smaller gap in the current and quick ratio means inventory represents a very small portion of the current assets.

3. e) lower fixed asset turnover ratio than total asset turnover ratio.

Since intangible assets and goodwill are not included in fixed assets.

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