Principles of Finance Chapters 1 – 4

Flashcard maker : Lily Taylor
The science and art of managing money is called _______.
*finance* (Ch.1; pg. 4)
The part of finance concerned with design and delivery of advice and financial products to individuals, business, and government is called ______.
*financial services*
(Ch. 1; pg. 4)
Career opportunities in *financial services* include:
-Personal financial planning
-Real estate
(Ch.1; pg.4)
The rule setting body, which authorizes generally accepted accounting principles is _______.
*Federal Accounting Standards Board (FASB)*
(Ch.3; pg. 60)
The accounting practices and procedures used to prepare financial statements, authorized by the FASB, are ______.
*Generally Accepted Accounting Practices (GAAP)*
(Ch. 3; pg. 60)
The federal regulating body governing the sale and listings of securities is called the _______.
*Securities and Exchanges Commission (SEC)*
(Ch. 2; pg. 46)
*Operating profits* are defined as ______.
*Earnings before interest and taxes (EBIT)*
(Ch. 3; pg.62)
_____ is concerned with the duties of the financial manager working in a business; involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
*Managerial finance*
(Ch. 1; pg. 4)
How do you calculate *net profits (income) after taxes*?
*Net profit after taxes* = Operating profit (sales revenue-COGS-operating expenses) – interest expenses – taxes
A ____________ is a business owned by one person and operated for his or her own profit.
*sole proprietorship*
(Ch. 1; pg. 6)
A ____________ is a business owned by two or more people and operated for profit.
(Ch. 1; pg. 6)
What is the written contract typically used to establish a partnership called?
*articles of a partnership*
(Ch. 1; pg. 6)
A ___________ is an entity created by law. It has the legal powers of a individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name.
(Ch. 1; pg. 6)
Which legal form of an organization is the most expensive to organize?
(Ch. 1; pg. 7-8)
Which legal form of organization’s income is NOT taxed under individual income tax rate?
(Ch. 1; pg. 7-8)
Under which legal form of organization is the ownership readily transferable?
(Ch. 1; pg. 7-8)
Name six key *strengths* of a *corporation*?
1. limited liability for owners
2. large growth potential via sale of stock – access to capital markets
3. ownership is readily transferable (stock)
4. Long lifetime
5. Can hire professional managers
6. Better access to financing
(Ch. 1; pg. 7-8)
All of the following are key *strengths* of a *corporation* EXCEPT
a. access to capital markets
b. limited liability
c. low organization costs
c. *low organization costs*
(Ch. 1; pg. 7-8)
Name three key *weaknesses* of a *corporation*.
1. Higher taxes, double taxation
2. More expensive to organize
3. Lacks secrecy
(Ch. 1; pg. 7-8)
What two legal forms of organizations are characterized by *unlimited liability*?
*sole proprietorship* and *partnership*
(Ch. 1; pg. 7-8)
Which of the following legal forms of organization is characterized by *limited liability*?
a. sole proprietorship
b. partnership
c. corporation
d. professional partnership
c. *corporation*
(Ch. 1; pg. 7-8)
What are the two key variables that managers must consider when making business decisions?
*Return* (cash flow) and *risk*
(Ch. 1; pg. 11)
The decision rule for managers is:
*”Only take actions that are expected to increase the wealth of the shareholders.”*
(Ch. 1; pg. 11)
*Wealth maximization*, as the goal of the firm, implies enhancing the wealth of ______________.
the firm’s *stockholders*
(Ch. 1; pg. 10-11)
The amount earned during the accounting period on *each* outstanding share of common stock is called _________.
*earnings per share (EPS)*
(Ch. 1; pg. 11)
What does *EPS* represent?
Earnings per share; the number of dollars earned during the period on behalf of each outstanding share of common stock.
(Ch. 3; pg. 63)
How do you calculate the *earnings per share (EPS)*?
*EPS* = Earnings available for common shareholders divided by the # of shares outstanding
(Ch. 3; pg. 63)
*Profit maximization* does NOT take in consideration ______and ______.
*risk* and *cash flow*
(Ch. 1; pg. 11)
*Profit maximization* may NOT lead to the highest possible share prices for at least 3 reasons:
1. *Timing*- the receipt of funds sooner rather than later
2. *Cash flows*- profits don’t necessarily result in cash flows
to stockholders
3. *Risk*- PM fails to account for risk
(Ch. 1; pg. 12)
*Profit maximization* FAILS because it ignores all EXCEPT _____.
*Earnings per share (EPS)*
(Ch. 1; pg. 11-12)
*Return and risk* are the key determinants in *share price*. INCREASED RISK, other things remaining the same, result in a ___________ share price .
(Ch. 1; pg. 11-12)
*Return and risk* have a(n) ______ on share price.
*inverse effect*
(Ch. 1; pg. 12)
*Return and risk* are the key determinants in *share price*. INCREASED *return* results in a______________ share price.
(Ch. 1; pg. 12-13)
As the *risk* of stock investments INCREASE, the required rate of return will __________.
*INCREASE* (Because investors are risk adverse.)
(Ch. 1; pg. 13)
Who are the groups such as employees, customer, suppliers, creditors, owners, and others who have a direct economic link to the firm?
(Ch. 1; pg.13)
What are the standards of conduct or moral judgement that apply to persons engaged in commerce?
*Business ethics*
(Ch. 1; pg.13)
An *ethics program* is expected to have a _____ impact on the firm’s share price.
(Ch. 1; pg. 14)
*Ethics programs* seek to:
1. reduce litigation and judgement costs
2. maintain a positive corporate image
3. build shareholder confidence
4. gain the loyalty and respect of all stakeholders
(Ch. 1; pg. 13- 14)
The______ is the firm’s financial chief, who manages the firm’s cash, oversees its pension plans, and manages key risks.
(CH. 1; pg. 16)
The *treasurer* is commonly responsible for _________.
*making capital expenditures*
(Ch. 1; pg. 16)
The _____ is the firm’s chief accountant who is responsible for the accounting activities such as corporate accounting, tax management, financial accounting, and cost accounting.
(Ch. 1; pg. 16)
The *controller* is commonly responsible for _________.
*financial accounting*
(Ch. 1; pg. 16)
The _________ is responsible for managing and monitoring the firm’s exposure to loss from currency fluctuations.
*foreign exchange manager*
(Ch. 1; pg. 16)
___________ administer the financial affairs of ALL types of businesses. Tasks include:
– developing a financial plan or budget
– extending credit to customers
– evaluating proposed large
– raising money to fund the firm’s
*Financial managers*
(Ch. 1; pg. 4)
Name three factors that have increased the importance & complexity of the *financial manager’s* duties?
1. recent global financial crisis and subsequent responses by
2. increased competition
3. technological change
(due to globalization)
(Ch. 1; pg. 4-5)
*Economic theories* that a *financial manager* must be able to utilize for efficient business operations are: (name 4)
1.* Supply and demand analysis*
2. *Marginal analysis*
3. *Profit maximizing strategies*
4. *Price theory*
(Ch. 1; pg. 16)
What is the economic principle that states that financial decisions should be made and actions should be taken only when the added benefits exceed the added costs?
*Marginal cost-benefit analysis*
(Ch. 1; pg. 16)
In planning and managing the requirements of the firm, what should the *financial manager* be concerned with?
1. the *mix and type of assets*
2. the *type of financing utilized*
3. an *analysis* to monitor the financial condition
(Ch. 1; pg. 19)
The *financial manager* recognizes revenues and expenses utilizing the actual ______&_______ of cash.
* inflows* and *outflows *
(Ch. 1; pg. 17)
The ____ recognizes revenue and expenses only with respect to actual inflows and outflows of cash; the financial view.
*cash basis* (e.g. cash flow statement)
(Ch. 1; pg. 17)
The *primary economic principle* used in *managerial finance* is?
*Marginal (cost-benefit) analysis*
(Ch. 1; pg. 16)
In preparation of financial statements, the ____ recognizes revenue at the time of sale and recognizes expenses when they are incurred; the accounting view.
*accrual basis* (e.g.income statement)
(Ch. 1; pg. 17)
________ do not use the accrual basis, they rely solely on cash flows to measure their financial outcomes.
(Ch. 1; pg. 18)
The primary emphasis of the *financial manager* is the use of ____________.
*cash flow*
(Ch. 1; pg. 17)
*Marginal analysis* states that financial decisions should be made and actions taken only when _________________.
*added benefits* EXCEED *added costs*
(Ch. 1; pg. 16)
Making *investment decisions* includes all of the following EXCEPT _____________.
a. inventory
b. fixed assets
c. accounts receivable
d. notes payable
*notes payable*
(Ch. 1; pg. 19)
The *financial manager’s investment decisions* determine _________________.
both the *mix* & *type of assets* found on the firm’s *balance sheet*
(Ch. 1; pg. 19)
Making *financial decisions* include all of the following EXCEPT _______________.
a. determining the appropriate mix of short-term and
long-term financing
b. deciding which individual short-term sources are best at
a given point in time
c. analyzing quarterly budget and performance reports
d. deciding which individual long-term sources are best at a
given time.
c. *analyzing quarterly budget* and *performance reports*
(Ch. 1; pg. 19)
________ decisions generally refer to the items on the *left*-hand side of the balance sheet, ______ and ______.
*Investment*; *current assets* and *fixed assets*
(Ch. 1; pg. 19)
Making *financial decisions* includes:
1. Determining the appropriate mix of short-term and
long-term financing.
2. Deciding which individual short-term sources are best at
a given point in time.
3. Deciding which individual long-term sources are best at a
given time.
(Ch. 1; pg. 19)
________ decisions generally refer to the items on the *right*-hand side of the balance sheet, ______ and ______.
*Financial*; *current liabilities* and* long-term funds*
(Ch. 1; pg. 19)
The rules, processes, and laws by which companies are operated, controlled, and regulated is referred to as _______.
*corporate governance*
(Ch. 1; pg. 20)
The act aimed at eliminating corporate disclosure and conflict of interest problems which contains provisions about corporate financial disclosures and the relationships among corporations, analysts, directors, officers, and shareholders is the ________________.
*Sarbanes-Oxley Act of 2002 (SOX)*
(Ch. 1; pg. 21)
The __________ is the arrangement in which an agent acts on the behalf of a principle, e.g. shareholders of a company (principals) elect management (agents) to act on their behalf.
*principle-agent relationship*
(Ch. 1; pg. 21)
Investors who own relatively small quantities of shares as to meet personal investment goals are called __________.
*individual investors*
(Ch. 1; pg. 20)
Institutional professionals such as banks, insurance companies, mutual funds, and pension funds that are paid to manage and hold large quantities of securities on behalf of others are ____________.
*institutional investors*
(Ch. 1; pg. 20)
The conflict between the goals of the firm’s owners and the goals of it’s non-owner managers, e.g. managers place their personal goals ahead of the goals of the shareholders, is referred to as the ___________.
*agency problem*
(Ch. 1; pg. 22)
____________ arise from agency problems that are borne by shareholders and represent a loss of shareholder wealth.
*Agency costs*
(Ch. 1; pg. 22)
*Agency costs* include all of the following EXCEPT:
a. bonding and structuring expenses
b. cost of goods sold
c. monitoring expenditures
d. managerial compensation
*Cost of Goods Sold*
(Ch. 1; pg. 22)
*Agency costs* include:
1. bonding and structuring expenses
2. monitoring expenditures
3. managerial compensation
(Ch. 1; pg. 22)
______________ are management compensation plans that *tie management compensation to share price*, e.g. the granting of stock options.
*Incentive plans*
(Ch. 1; pg. 22)
_____________ tie management compensations to measures such as EPS or growth in EPS. Performance shares and/or cash bonuses are used under these plans.
*Performance plans*
(Ch. 1; pg. 22)
The ______________ by another firm that believes it can enhance the troubled firm’s value by restructuring its management, operations, and financing can provide a strong source of external corporate governance and tends to motivate the management to act in the best interests of the firm’s owners.
*threat of takeover*
(Ch. 1; pg. 23)
Which of the following is NOT a *financial institution*?
a. a commercial bank
b. an insurance company
c. a pension fund
d. a newspaper publisher
*a newspaper publisher*
(Ch. 2; pg. 32)
__________ are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments.
*Financial institutions*
(Ch. 2; pg. 32)
Name three examples of *financial institutions*.
1. commercial banks
2. insurance companies
3. pension funds
(Ch. 2; pg. 32)
Who are the key participants (suppliers and demanders) of funds?
1. *Individuals*
2. *Businesses*
3. *Governments*
(Ch. 2; pg. 32)
In general, individuals are _________ of funds, while businesses and governments are __________ of funds.
*net suppliers*; *net demanders*
(Ch. 2; pg. 32)
______ are institutions that provide savers with a place to invest their funds and offer loans to individuals and business borrowers.
*Commercial banks*
(Ch. 2; pg. 33)
________ are institutions that (1) assist companies in raising capital, (2) advise firms on major transactions such as mergers or financial restructurings, and (3) engage in trading and market making activities; e.g., Berkshire Hathaway.
*Investment banks*
(Ch. 2; pg. 33)
The ________ was an act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks. It was later repealed in 1999 by Congress.
*The Glass-Steagall Act*
(Ch. 2; pg. 33)
The ___________ is described as a group of institutions that (1) engages in lending activities, (2) do NOT accept deposits (capital comes from investors), and (3) aren’t subject to the same regulations as traditional banks.
*shadow banking system*
(Ch. 2; pg. 33)
The international equivalent of the domestic ( U.S.) money market is the __________.
*Eurocurrency market*
(Ch. 2; pg. 35)
Nearly all Euro-dollar deposits are ________, meaning that the bank would promise to repay the deposit, with interest, at a fixed date in time.
*time deposits*
(Ch. 2; pg. 35)
Firms that require funds from EXTERNAL sources can obtain them in 3 ways:
1. *financial markets*
2. *financial institutions*
3. *private placement*
(Ch. 2; pg. 32)
Forums in which suppliers of funds and demanders of funds can transact business directly are called __________.
*financial markets*
(Ch. 2; pg. 34)
The two key *financial markets* are the __________ and the __________.
*money market* and *capital market*
(Ch. 2; pg. 34)
Transactions in *short-term* debt instruments, or marketable securities, take place in the ____________.
*money market*
(Ch. 2; pg. 34)
*Marketable securities* are short-term debt instruments, such as:
1. U.S. Treasury bills
2. Commercial paper issued by businesses
3. Negotiable certificates of deposit (CDs) issued by financial
institutions, government, and businesses.
(Ch. 2; pg. 34; slide 2-12)
Long-term securities traded in the capital market include _________ and ________.
*stocks*; *bonds*
(Ch. 2; pg. 34)
Investors generally consider *marketable securities* to be among the least risky investments available. True or False?
(Ch. 2; pg. 34; slide 2-12)
__________ is the sale of either bonds or stocks to the general public.
*Public offering* (IPO)
(Ch. 2; pg. 34)
The ______ is the financial market in which securities are INITIALLY issued; the only market in which the issuer is directly involved in the transaction- proceeds from the sale of shares goes directly to the corporation; the market where “new securities are sold.
*primary market*
(Ch. 2; pg. 34)
The way firms can raise money by selling new securities (e.g. stocks & bonds) directly to an investor or group of investors (e.g. insurance company or pension fund) is called _______.
*private placement*
(Ch. 2; pg. 34)
The _______ is the financial market in which pre-owned securities are traded.
*secondary market*
(Ch. 2; pg. 34)
The secondary market can be divided into 2 segments on the basis of how securities were traded. These 2 segments are the ______ and _______.
*broker market*; *dealer market*
(Ch. 2; pg. 36)
The two key *financial markets* are the _______ and ________.
*money market* and *capital market*
(Ch. 2; pg. 34-35)
The ______________ is created by a financial relationship between suppliers and demanders of LONG-term funds; a market that enables suppliers and demanders of long-term funds to make transactions.
*capital market*
(Ch. 2; pg. 35)
The key *capital market* securities are:
1. bonds
2. common stock
3. preferred stock
(Ch. 2; pg. 35)
______ , such as NASDAQ, are markets in which the the buyer and seller are *not* brought together directly but instead their orders executed by securities dealers that “make markets” in the given security; it has no centralized trading floors instead they are linked together via mass- telecommunications network.
*Dealer markets*
(Ch. 2; pg. 36)
As compensation for executing orders, “market makers” make money on the _____ .
*spread* – the bid price (highest price offered) less the ask price (the lowest price offered for sale)
(Ch. 2; pg. 36,38)
From a firm’s perspective, the role of a capital market is to be a _________ where firms can interact with investors in order to obtain valuable external financing resources.
*liquid market*
(Ch. 2; pg. 39)
From investor’s perspectives, the role of a capital market is to be a _________ that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses.
*effective market*
(Ch. 2; pg. 39)
An emerging field that blends ideas from finance and psychology, argue that stock prices and prices of other securities can deviate from their true values for extended periods is called _________.
*behavioral finance*
(Ch. 2; pg. 40)
The dealer market is made up of the __________, an all-electronic trading platform used to execute securities trades, and the ___________, where smaller unlisted securities are traded.
*NASDAQ market* ( the largest); *over-the-counter market* (OTC)
(Ch. 2; pg. 38)
In the _____, corporations and governments typically issue bonds denominated in dollars and sell them to investors located *outside* of the U.S.
*Eurobond market*
(Ch. 2; pg. 38)
The _______ is a market for bonds issued by a foreign corporation or government that is denominated in the investor’s home currency and sold in the investor’s home market.
*foreign bond market*
(Ch. 2; pg. 39)
A bond that is issued by a foreign corporation or government that is denominated in the investor’s home currency and sold in the investor’s home market is called a ______.
*foreign bond*
(Ch. 2; pg 39)
_____are securities exchanges on which the 2 sides of a transaction, the buyer and seller, are brought together at a physical centralized location to trade securities.
*Broker markets *
(Ch. 2; pg. 36)
The dominant *broker market* is the ______.
*NYSE Euronext*
(Ch. 2; pg. 37)
The ___________ allows corporations to sell blocks of shares to investors in a number of different countries simultaneously.
*international equity market*
(Ch. 2; pg. 39)
The ______________ is created by a financial relationship between suppliers and demanders of SHORT-term funds; a financial relationship created between suppliers and demanders of short-term funds.
*money market*
(Ch. 2; pg. 35)
_________ are long-term debt instruments used by businesses and government to raise large sums of money, generally from a diverse group of lenders.
(Ch. 2; pg. 35)
__________ is the purest and most basic form of corporate ownership; or, are units of ownership interest or equity in a corporation.
*Common stock*
(Ch. 1 & 2; pg.7, 36)
__________ is a special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common shareholders; or, is a special form of ownership that has features of both a bond and a common stock.
*Preferred stock*
(Ch. 2; pg. 36 & slide 2-14)
_________ bonds typically pay ___________ at a stated coupon interest rate; initial maturity is typically 10 to 30 years and par value must be repaid at maturity.
*Corporate*; *semiannually*
(Ch. 2; pg. 35)
The face value of securities are referred to as _________.
*par (par value)*
(Ch. 2; pg. 35)
Securities issued *above* par are said to be issued at a _________.
(Lecture; slide 2-15)
Securities issued *below* par are said to be issued at a _________.
(Lecture;slide 2-15)
__________ is always calculated on par, not price.
*Interest* (coupon interest rate)
(Lecture; slide 2-15)
A *competitive market* that allocates funds to their most productive use is called a(n) _________________.
*efficient market*
(Ch. 2; pg. 39)
The process of pooling mortgages or other types of loans and then selling claims or securities against the pool in a secondary market is called _______.
(Ch. 2; pg. 41)
Securities that represent claims on the cash flows generated by pool of mortgages are ________
*mortgage-backed securities*
(Ch. 2; pg. 41)
The primary risk associated with ________ is that homeowners may not be able to, or may choose to, repay their loans.
*mortgage-back securities*

(Ch. 2; pg. 41)

Mortgage loans made to borrowers with lower incomes or poorer credit histories are called ________.
*subprime mortgages*
(Ch. 2; pg. 42)
The _________ is an agency that was established by the Glass-Steagall Act of 1933 which provides insurance for deposit, up to $250,000, at banks and monitors their safety and soundness.
*Federal Deposit Insurance Corporation (FDIC)*
(Ch. 2; pg. 45)
The _______ is an act that allows business combinations, e.g. mergers, between commercial banks, investment banks, and insurance companies and thus permits these institutions to compete in markets that prior regulations prohibited them from entering.
*Gramm-Leach-Bliley Act* (1999)
(Ch. 2; pg. 45)
The ______________ regulates the sale of securities to the public via the *primary market* by requiring sellers of new securities to provide extensive disclosures to potential buyers.
*Securities Act of 1933*
(Ch. 2; pg. 45)
The _____________ regulates the trading of securities such as stocks and bonds in the *secondary market*.
*Securities Exchange Act of 1934*
(Ch. 2; pg. 45)
The primary agency, created by the Securities Exchange Act of 1934, which is responsible for enforcing federal securities laws is the _________.
*Securities Exchange Commission* (SEC)
(Ch. 2; pg. 46)
The two types of income are:
1. *ordinary income*
2. *capital gains*
(Ch. 2; pg. 46)
Income earned through the sale of goods and services or from interest received is referred to as ________.
*ordinary income*
(Ch. 2; pg. 46, 48)
A firm’s _______ represents the rate at which additional income is taxed.
*marginal tax rate*
(Ch. 2; pg. 47)
A firm’s taxes divided by its taxable income is the ________.
*average tax rate*
(Ch. 2; pg. 47)
A situation that occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount is called _____.
*double taxation*
(Ch. 2; pg. 48)
Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to AVOID _____________.
*triple taxation on dividends*

(Ch. 2; pg. 48)

In calculating taxes,corporations can deduct ________and ______ , but NOT _______ paid.
*operating expenses* and *interest expenses*; *dividends*
(Ch. 2; pg. 48)
A *capital gain* occurs when an asset has been held for __________.
*more than one year*
(Ch. 2; pg. 49)
If a corporation sells an asset for more than their initial purchase price, the difference between the sale price and the purchase price is called ____________.
*capital gains*
(Ch. 2; pg. 49)
For corporations, capital gains are added to _____ and taxed like ________ at the regular corporate rates.
*ordinary income*; *ordinary income*
(Ch. 2; pg. 49)
*Operating profits* are defined as __________.
*Earnings before interest and taxes* (EBIT)
(Ch. 3; pg. 62)
Net profits (after taxes) less (-) preferred stock dividends arrives at (=) _____________.
*earnings available for common stockholders*.
(Ch. 3; pg. 63)
The dollar amount of cash distributed among the period on behalf of each outstanding share of common stock is called ________.
*dividend per share* (DPS)
(Ch. 3; pg. 63)
_________ refers to a firm’s ability to satisfy its short-term obligations as they come due;or, an asset’s closeness to cash.
(Ch. 3; pg. 73)
The DuPont system merges the income statement and balance sheet into two summary measures of profitability:
*return on total assets* and *return on equity*
The _________ measures the return on owners’ investment in the firm.
*Return on Equity*
The _____ measures the overall effectiveness of management in generating profits with it’s available assets.
*Return on total assets*
__________ is used by financial managers s a structure for dissecting the firms financial statements to assess it’s financial condition.
*The DuPont System of Analysis*
*Time series analysis* is often used to____________.
*assess developing trends*
The analyst should be careful when evaluating a ratio analysis because
the overall performance of the firm is not judged on a single ratio, the dates of the financial statements being compared are the same, audited statements are used and the same accounting procedures were used.
An analysis in which the firm’s ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas of improvement is called __________.
*Cross-section ratio analysis* is used to_________.
reflect the symptoms of a possible problem
__________ ratios are a measure of the speed with which various accounts are converted into cash
The __________ is useful in evaluating credit and collection policies.
*average collection period*
The _______ ratio may indicate that the firm is experiencing stockouts and lost sales.
*Inventory Turnover*
ABC Corp. extends credit terms of 45 days to its customers. It’s credit collect would considered poor if its average collection period was_____ days.
If the inventory turnover is divided into 365, it becomes a measure of the__________.
*average age of inventory*
The higher the value of ________ ratio, the better able the firm is to fulfill it’s interest obligations.
*Times interest earned*
A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive
general and administrative expenses
In the DuPont System, the return on total assets (asset) is equal to
net profit margin times total asset turn over
the modified DuPont formula, relates the firm’s return on total assets ROA to the
Financial Leverage Multiplier
In the DuPont system, the return on equity is equal to
return on total assets times financial leverage multiplier
A decrease in total asset turnover will result in _____ in the return on equity.
a decrease
A firm with a substandard return on total assets can improve its return on equity, all else remaining the same, by
increasing it’s debt ratio
The three summary ratios basic to the DuPont System of Analysis are:
1. Net Profit Margin
2. Total Asset Turnover
3. Equity Multiplier

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