Question

1. As an investor of a company, you want to find out your ROI provided by the company at the end of the current year.   Which of the following formulas would you use?

Group of answer choices

Net Income divided by the Average Asset of the company.

Net Income divided by the Sales amount of the company.

Net Income divided by the Equity amount of the company's ending Balance Sheet.

Net Income divided by the average amount of the Total Equities of the beginning & ending Balance Sheets of the company

2. You want to find out whether the management of a company had invested well to generate enough revenues. Which of the following formulas would you use?

Group of answer choices

Net Income divided by the average Assets of the beginning & ending Balance Sheets

Revenues divided by the average Assets of the beginning & ending Balance Sheets

Net Income divided by the Revenues

Net Income divided by the average Equity of the beginning & ending Balance Sheets

3. We know that all the decisions made by the management of a company must be made to maximize the value of the company so that its owners’ wealth is maintained at its maximum level (or amount). Which one of the following describes best the ultimate measurement of this effort? (Limit your answer to publicly traded companies.)

Group of answer choices

Maximizing its revenues amount ($) continuously each year

Maximizing its net profit amount ($) continuously each year

Increasing the size of Shareholders’ Equity (Owners’ Equity) – ($ as well as its % over Total Assets) – of the Balance Sheet continuously each year

Coordinating management policies and operational efficiency, along with financing decisions to maintain the stock price at the highest level in the market

Answer 1

1. Answer is the fourth option

Return on equity is computed by dividing net income by average stockholders equity. Average stockholders’ equity is the average of beginning and closing balance of total equities in the Balance sheet. A higher return on equity is favorable for the shareholders since it returns higher return on investment. A return on equity is a profitability ratio and widely used in industry to measure profitability

2. Answer is the second option

The assets turnover ratio is the ratio which helps in finding out whether management of a company has invested well to generate enough revenues. The asset turnover ratio is calculated dividing total revenue by the average total assets. The average total assets are the average of opening and closing total assets. A higher assets turnover ratio is preferred by the investors since it will lead to high revenue generation from assets

3. Answer is fourth option

A stockholders wealth maximisation is achieved though maintaining higher market price of the firm’s share. A higher share price can be obtained through better management polices and operational efficiency which saves cost and increases the net income available to shareholders to increase earnings per share. Also the financing decision must be optimized to ensure the cost of capital is lower in meeting the financial requirements of the firm. So answer is fourth option.