Question

What advantages can be cited for management calculating the firm's return on capital (ROC) using both the after-tax operating margin and the capital turnover ratio?

I. To provide insight into variables responsible for generating ROC
II. To better understand how effectively the firm's invested capital is being used
III. To assist in determining the firm's expected growth rate

Select one:

A. I only

B. II only

C. I and II only

D. I and III only

E. II and III only

F. I, II, and III

Which of the following statements concerning existing projects is true?

Select one:

a. All projects earning less than their cost of capital should be sold.

b. Some projects earning less than their cost of capital should be sold.

c. No projects earning less than their cost of capital should be sold.

d. Earning the cost of capital should have nothing to do with continuing or selling existing projects.

Answer 1

Return on Capital = Total Return/Total Capital

Operating Margin Ratio = Operating Profit/Net Sales * 100

Capital Turnover Ratio =Net Sales/Average Working Capital

Therefore, C is the right answer

I and II only

Which of the following statements concerning existing projects is true?

Cost of Capital is the minimum amount of return required from a project. So, in case of an existing project, All projects earning less than their cost of capital should be sold, since they generate less than the minimum return

Hence, A