Question

Company XYZ is a high technology company. It is planning on acquiring another company in the high technology sector. Company XYZ dose not have enough cash to acquire the company and is planning on financing the acquisition through a bond offering. Which of the following measures is company XYZ MOST LIKEY to use in its analysis of operating profits considering it is a high debt transaction?

A. LONG-TERM DEBT TO CAPITAL

B. EBITDA margin

C.Net profit margin

D.return on equity

The most common way that companies structure their treasury operations is as a(n):

A. Cost center

B. Profit center

C. Shared service center

D. In-house bank

Answer 1

Operating profit= Earnings before interest and tax (EBIT)

Company XYZ should most likely use 'long term debt to capital' ratio in its analysis of operating profits. Debt to capital ratio measures the financial leverage of the company. When this ratio is high, this shows that the company has used a large amount of debt to fund its growth. A large amount of debt could generate an increased earning which will outweigh the debt costs and pay earnings to shareholders as well. Otherwise, this increased debt cost could outweigh the earnings and could not be sustained by the company.

The most common way companies structure their treasury operations is as a profit center.

Treasury departments use strategies like cash forecasting, financial risk management, access to credit, balance sheet optimization to cope with financial volatility and uncertainty. Treasury Department activities include operational efficiency, foreign exchange execution, short-term investments, pooling structure, banking services, outward payments, and inward receipts. This makes it a profit center.