Question

1)a)Which of the following financial ratios would you use to measure profitability?

Debt-to-Assets

ROFA

Operating Expense Ratio

Working Capital

b)The COFD = 8.5% and ROFA is 8.8%. What do we know about ROFE?

ROFE is less than 8.5%

ROFE is greater than 8.5% but less than 8.8%

ROFE is greater than 8.8%

There is insufficient information to determine a range for ROFE

c)The Operating Expense Ratio increases while the Depreciation Expense Ration and Interest Expense Ratio stay the same. What will happen to the Net Farm Income From Operations Ratio?

It will decrease

It will increase

It will remain the same

There is insufficient information to answer this question

d)The COFD = 8.5% and ROFE is 8.8%. What do we know about ROFA?

ROFA is less than 8.5%

ROFA is greater than 8.5% but less than 8.8%

ROFA is greater than 8.8%

There is insufficient information to determine a range for ROFA

e)The Working Capital should be a _________ number to signal liquidity and the Current Ratio should be ________ 1 to be liquid.

positive, less than

positive, equal to

positive, greater than

negative, less than

negative, equal to

negative, greater than

Answer 1

Answer 1(a) The best ratio to measure profitability out of the given one's is ROFA ie. Return on Fixed Assets Ratio. It gives the return generated by the fixed fixed assets and is calculated by dividing the EBIT that is Earnings Before Interest and Taxes from the Tangible Assets that a firm has. It is expressed over a period of time. It is also called as Fixed Assets Turnover Ratio and is used by analysts to measure operating performance. A ROFA implies that the company or the firm has used it's investments effectively in fixed assets to generate sales.

Operating Expense Ratio.It tells us about the cost to operate a piece of property or a project compared to the income generated from the project. It is calculated by dividing the operating expense less the depreciation by the gross operating income.A lower operating Expense Ratio is desireable to the investors as the returns are high and the expenses or the costs involved are low.

Debt to Asset ratio tell us about the total amount of debt a company has underataken out of it's total assets. It is a leverage ratio which is a measure of liquidity and not profitability.

Working Capital Ratio is calculated by simply dividing the current assets by the current liabilities.It is also called current ratio and is a also a measure of liquidity.

Answer 1(e) The working capital should be a positive number to signal liquidity and the current ratio should be greater than one to be liquid.

The reason for the same is that positive working capital implies that there are more current assets than the current liabilities. Ans more current assets over current liabilities is a symbol of greater liquidity.

The current ratio is good to be greater than one because positive current ratio implies good liquidity position of the firm. A current ratio below one implies that a company doesn't have enough liquid assets to cover it's short term liabilities.

Answer 1(c) The Operating Expense Ratio increases while the Depreciation Expense Ration and Interest Expense Ratio stay the same. The Net Farm Income From Operations Ratio will decrease.

The reason for the same is that lower the OER the better it is. If OER increases then it means that expense has increased and the income has reduced. Hence an increasing OER signals lower Net Farm Income form Operations.