Question 1

Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round off to the nearest 0.1%)

Accepted Answer

Return on equity = Net income / (Total assets - Total debt)= 276,000 / (3,000,000 - 0.3 * 3,000,000)= 276,000 / 2,100,000= 13.1%

Question 2

What are some of the main limitations of ratio analysis?

Accepted Answer

The answer of What are some of the main limitations...

Question 3

Explain the different ways that a firm's ratios can be benchmarked.

Accepted Answer

The answer of Explain the different ways that a firm's...

Question 4

There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

Accepted Answer

Ratio analysis is limited by the fact that it relies on accounting data that is based on historical costs rather than current market values. This can distort the true value of a firm's assets and liabilities, and make it difficult to accurately assess its financial position.

Question 5

Which of the following is not a method of "benchmarking"?

Accepted Answer

The DuPont system is not a method of benchmarking. It is a financial analysis tool that breaks down a company's return on equity into several components to understand the sources of its profitability. Benchmarking methods involve comparing a company's performance to that of other companies in the same industry or to its own past performance. A, C, and D are all examples of benchmarking methods.

Question 6

Compare how a firm's creditor would analyze a firm's financial statements relative to those of a firm's shareholders.

Accepted Answer

The answer of Compare how a firm's creditor would analyze...

Quiz 4: Analysing Financial Statements