Question

14) Nonconsolidated subsidiaries and equity investments should be measured and valued separately from other items when calculating a firms invested capital.

a) True. b) False. c) Both.





15) Which metric is the best indicator of a company’s operating performance?

a) ROE. b) ROA. c) ROIC. d) EPS. e) P/E.


17) Multinational Co. (MNC) generated $1,500 million in domestic earnings before interest, taxes, and amortization (EBITA). MNC amortizes intangible assets at $275 million per year and takes a $160 million interest expense. MNC’s statutory (domestic) tax rate is 21.5 percent on earnings before taxes, but only 15 percent on foreign operations. MNC had $150 million of pre-tax foreign income and generates $35 million in ongoing research and development (R&D) tax credits. What is its effective tax rate on pre-tax profits?

a) 16.7 %. b) 17.8 %. c) 21.5 %. d) 23.3 %. e) 10.8 %.

Answer 1

14.(a) True.

Nonconsolidated subsidiaries and equity investments are companies in which the parent company holds a non-controlling equity stake .Because the parent company does not have formal control over these subsidiaries,their financials are not consolidated,so these investments must be valued separately from operations.

15.(b).ROA

ROA is a better metric of financial performance than income statement profitability measures like return on sales. ROA explicitly takes into account the assets used to support business activities. It determines whether the company is able to generate an adequate return on these assets rather than simply showing robust return on sales.

Asset-heavy companies need a higher level of net income to support the business relative to asset light companies where even thin margins can generate a very healthy return on assets.

Using ROA as a key performance metric quickly focuses management attention on the assets required to run the business.