Question

true/false
1. Financial leverage index = return on equity/return on assets
2. Market to book ratio = stock price/earning per share
3. Total return to shareholders = stock price appreciation .
4. Working capital turnover measures inventory management.

Answer 1

Answer(1)

Financial Leverage Index helps an investor to understand how efficiently the firm is suing the leverage in order to increase its return on equity.In other words: it enables the investors to understand that how effectively the company is using leverage in its capital structure.

Financial Leverage Index is calculated as follows:

Financial Leverage Index= Return on Equity(ROE)/Return on Assets(ROA)

Hence the above statement as given in the question is true.

Answer (2):

The Market to Book Value Ratio helps the investors to evaluate a firm's current market value with respect to its book value.

Market to Book Value Ratio is used by investors for analyzing the market's view towards that particular stock's value. It is used for calculating the value of any insurance company, financial company,etc.

Market to Book Value Ratio is calculated as:

Market to Book Value Ratio= Current Market Price per share/Net Book Value Per Share

where: Net Book Value Per Share=( Assets-Liabilities)/Total number of outstanding shares

Hence : the above statement as mentioned in the question is false.

Answer (3):

The total return to the shareholders is a combination of the appreciation(increase) in the share price and the dividends paid to the shareholders .

Thus the total return to the shareholders is not equal to the appreciation in the share price.

Hence the above the statement as given in the question is false.

Answer (4):

Working Capital Turnover Ratio measures how efficiently the company is utilizing its working capital in supporting a particular level of sales.

Working Capital Turnover Ratio= Net Sales/Average Working Capital

Hence the above the statement as given in the question is false.