MGT 6201 UPDATED LATEST ANSWERS AND
QUESTIONS SET A+
✔✔Profit Margin (PM) Equation - ✔✔PM = Net Income / Net Sales
✔✔Profit Margin (PM) Interpretation - ✔✔High Margin = Luxury goods (Lambo). Low
margin = Volume sellers (Walmart)
✔✔Asset Turnover (AT) Definition - ✔✔Measures efficiency - how many dollars of
revenue are generated by each dollar of assets
✔✔Asset Turnover (AT) Equation - ✔✔AT = Net Sales / Average Total Assets
✔✔Asset Turnover (AT) Interpretation - ✔✔Interpretation: High turnover = Efficient use
of assets (Retailers). Low turnover = Asset heavy (Hotels, oil)
✔✔The DuPont Identity (Disaggregation of ROA) definition - ✔✔Explains how a
company achieves its ROA. There is a natural trade-off between margin and turnover
✔✔The DuPont Identity (Disaggregation of ROA) equation - ✔✔ROA = Profit Margin *
Asset Turnover
✔✔The DuPont Identity (Disaggregation of ROA) trade-off - ✔✔Costco/Walmart: Low
Margin * High Turnover
Lambo/Hotels: High Margin * Low Turnover
✔✔Return on Equity (ROE) shareholders' perspective - ✔✔How much profit is
generated on the money owners put in?
✔✔Average Shareholders' Equity Equation - ✔✔Avg. Shareholder Equity = (Beginning
Shareholder Equity + Ending Shareholder Equity) / 2
✔✔Return on Equity (ROE) Equation - ✔✔ROE = Net Income / Average Shareholders'
Equity
, ✔✔ROE DuPont Expansion (3-step) - ✔✔ROE = Profit Margin * Asset Turnover * Equity
Multiplier
✔✔Equity Multiplier (Financial Leverage) Equation - ✔✔Average Total Assets / Average
Shareholders' Equity
✔✔Equity Multiplier (Financial Leverage) Meaning - ✔✔Describes debt usage
Multiplier = 1 - No Debt (Assets = Equity)
Multiplier > 1: Company is using debt (Leverage)
✔✔Equity Multiplier (Financial Leverage) Risk/Reward - ✔✔High leverage boosts ROE
if things go well, but increases bankruptcy risk if they don't
✔✔Liquidity & Solvency meaning - ✔✔Can the company pay its bills
✔✔Working Capital - ✔✔Working Capital = Current Assets - Current Liabilities
✔✔Current Ratio - ✔✔Current Ratio = Current Assets / Current Liabilities
✔✔Current Ratio Target Value - ✔✔Around 1.0. Too high means "lazy" assets (excess
cash/inventory)
✔✔Quick Ratio - ✔✔Quick Ratio = (Cash + Marketable Securities + A/R) / Current
Liabilities
✔✔Why use Quick Ratio? - ✔✔Excludes inventory. Essential for companies like Sears
that couldn't sell their inventory (distress).
✔✔Debt to Equity Ratio - ✔✔Debt-to-Equity = Total Liabilities / Total Shareholders'
Equity
✔✔What does Debt to Equity measure? - ✔✔Reliance on debt vs owner funding
✔✔Efficiency Ratios & The Cash Cycle Meaning - ✔✔How fast does the company
convert activities into cash?
✔✔Receivables Turnover - ✔✔Receivables Turnover = Sales / Average A/R
✔✔Days Sales in Receivables (Average Collection Period) - ✔✔Days Sales in
Receivables = 365 / Receivables Turnover
✔✔Days Sales in Receivables meaning - ✔✔How many days it takes customers to pay
QUESTIONS SET A+
✔✔Profit Margin (PM) Equation - ✔✔PM = Net Income / Net Sales
✔✔Profit Margin (PM) Interpretation - ✔✔High Margin = Luxury goods (Lambo). Low
margin = Volume sellers (Walmart)
✔✔Asset Turnover (AT) Definition - ✔✔Measures efficiency - how many dollars of
revenue are generated by each dollar of assets
✔✔Asset Turnover (AT) Equation - ✔✔AT = Net Sales / Average Total Assets
✔✔Asset Turnover (AT) Interpretation - ✔✔Interpretation: High turnover = Efficient use
of assets (Retailers). Low turnover = Asset heavy (Hotels, oil)
✔✔The DuPont Identity (Disaggregation of ROA) definition - ✔✔Explains how a
company achieves its ROA. There is a natural trade-off between margin and turnover
✔✔The DuPont Identity (Disaggregation of ROA) equation - ✔✔ROA = Profit Margin *
Asset Turnover
✔✔The DuPont Identity (Disaggregation of ROA) trade-off - ✔✔Costco/Walmart: Low
Margin * High Turnover
Lambo/Hotels: High Margin * Low Turnover
✔✔Return on Equity (ROE) shareholders' perspective - ✔✔How much profit is
generated on the money owners put in?
✔✔Average Shareholders' Equity Equation - ✔✔Avg. Shareholder Equity = (Beginning
Shareholder Equity + Ending Shareholder Equity) / 2
✔✔Return on Equity (ROE) Equation - ✔✔ROE = Net Income / Average Shareholders'
Equity
, ✔✔ROE DuPont Expansion (3-step) - ✔✔ROE = Profit Margin * Asset Turnover * Equity
Multiplier
✔✔Equity Multiplier (Financial Leverage) Equation - ✔✔Average Total Assets / Average
Shareholders' Equity
✔✔Equity Multiplier (Financial Leverage) Meaning - ✔✔Describes debt usage
Multiplier = 1 - No Debt (Assets = Equity)
Multiplier > 1: Company is using debt (Leverage)
✔✔Equity Multiplier (Financial Leverage) Risk/Reward - ✔✔High leverage boosts ROE
if things go well, but increases bankruptcy risk if they don't
✔✔Liquidity & Solvency meaning - ✔✔Can the company pay its bills
✔✔Working Capital - ✔✔Working Capital = Current Assets - Current Liabilities
✔✔Current Ratio - ✔✔Current Ratio = Current Assets / Current Liabilities
✔✔Current Ratio Target Value - ✔✔Around 1.0. Too high means "lazy" assets (excess
cash/inventory)
✔✔Quick Ratio - ✔✔Quick Ratio = (Cash + Marketable Securities + A/R) / Current
Liabilities
✔✔Why use Quick Ratio? - ✔✔Excludes inventory. Essential for companies like Sears
that couldn't sell their inventory (distress).
✔✔Debt to Equity Ratio - ✔✔Debt-to-Equity = Total Liabilities / Total Shareholders'
Equity
✔✔What does Debt to Equity measure? - ✔✔Reliance on debt vs owner funding
✔✔Efficiency Ratios & The Cash Cycle Meaning - ✔✔How fast does the company
convert activities into cash?
✔✔Receivables Turnover - ✔✔Receivables Turnover = Sales / Average A/R
✔✔Days Sales in Receivables (Average Collection Period) - ✔✔Days Sales in
Receivables = 365 / Receivables Turnover
✔✔Days Sales in Receivables meaning - ✔✔How many days it takes customers to pay
