"Financial Report"：Financial Analysis Techniques

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Questions 1:

All else being equal, a decrease in which of the following financial metrics would most likely result in a lower return on equity (ROE)?

A、 The tax rate

B、 Leverage

C 、Days of sales outstanding

Questions 2:

The following selected financial information is available:

Financial Report：Financial Analysis Techniques

The company’s cash conversion cycle (in days) is closest to:

A 76.4.

B 45.2.

C 38.2

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. Leverage is a component of the return on equity equation under the DuPont Analysis. If leverage decreases, so will return on equity. ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Total asset turnover × Leverage A is incorrect. The tax burden is one of the components of ROE in the 5-factor model: Tax burden = Net income/EBT = (EBT – Tax)/EBT = 1 – Tax/EBT = 1 – Effective tax rate A lower tax rate means the company keeps more of its pre-tax profits (and has a higher tax burden).

A lower tax rate increases net income and increases ROE: an increase in any of the 5 components increases ROE.

C is incorrect. Days of sales outstanding is a component of the asset turnover measure. All else equal, if days of sales outstanding decreased, total asset turnover would increase. If asset turnover increases, so will return on equity.

【Answer to question 2】C

【analysis】

C is correct. Cash conversion cycle = DOH + DSO – Days of payables .