If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.
A) The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
B) The division's basic earning power ratio is above the average of other firms in its industry.
C) The division's total assets turnover ratio is below the average for other firms in its industry.
D) The division's debt ratio is above the average for other firms in the industry.
E) The division's inventory turnover is 6, whereas the average for its competitors is 8.

Question

Quizplus · Accepted Answer

A higher basic earning power ratio indicates that the manager is efficiently using the division's assets to generate earnings, which is a positive sign for the CEO. The other options either indicate lower efficiency or higher risk, which would not be viewed positively by the CEO.

If the CEO of a Large, Diversified, Firm Were Filling