Question

 

1) The Quick and Current Ratio are used to estimate

A. long term financial risk.

B. long term operational risk.

C. short term financial risk.

D. short term operational risk.

2)   When analyzing the Debt Ratio the most logical other financial ratio to analyze is the

A. Current Ratio.

B. Times Interest Earned.

C. ROE.

D. ROA.

3) The difference between the ROE and ROA tells us

A. nothing.

B. how much equity is invested in the firm.

C. how much return is generated by the firm.

D. how much return is generated by financial leverage as opposed to operational leverage.

4)   At the end of the growth phase the following financial ratio becomes more important to analyze

A. Current Ratio.

B. Days Sales Outstanding.

C. Debt Ratio.

D. ROA.

 

Answer 1

As per rules I will answer the first 4 subparts of the question

1)Short term financial risk

(Both current and quick ratio measure short term liquidity of the business. Hence they are not long term ratios. Besides they measure financial risk and are not related to operations.)

2)Times Interest Earned

(This is because the times interest earned ratio helps the management to analyse the interest coverage by the Net profits.Current ratio measures liquidity which is not affected by the amount of debt. Also ROE and ROS are internal efficiency ratios, not affected by debt)

3) how much return is generated by financial leverage as opposed to operational leverage.

(ROE tells us the returns on equity employed by the business whereas ROA refers to return on assets employed which is the operational leverage.)

4)ROA

(At the end of the growth phase, the ROA helps one to analyze the returns on assets employed during this period. It helps the management to understand the level of growth. The current ratio and DSO are short term and not related to the growth phase. The debt ratio depicts amount of debt undertaken and is again not as per the phase of the business)