D076 Unit 4
Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm
do in order to be competitive with accounts receivable management in the industry? - ✔✔Tighten the
credit standards for its customers.
MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios,
but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve
its return on equity, which action would help? - ✔✔Reduce costs to improve its overall profitability.
What does a debt ratio of 40% indicate? - ✔✔It indicates that 40% of assets are financed by debt.
What does a net margin of 7% indicate? - ✔✔For every dollar of revenue, 7 cents remain for the equity
holders after all other costs are covered.
What does an average collection period of 70 tell you? - ✔✔On average, a firm takes 70 days to collect
accounts receivable.
What does high inventory turnover relative to the industry and competitors indicate? - ✔✔The firm
does not hold enough inventory and is making its customers wait longer to receive their purchased
goods.
What does inventory turnover assess? - ✔✔The inventory management of a firm
What is operating margin useful for? - ✔✔Comparing the profitability of firms with different capital
structures
What is the difference between return on assets (ROA) and return on equity (ROE)? - ✔✔ROE considers
the capital structure of a company, while ROA does not.
Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm
do in order to be competitive with accounts receivable management in the industry? - ✔✔Tighten the
credit standards for its customers.
MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios,
but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve
its return on equity, which action would help? - ✔✔Reduce costs to improve its overall profitability.
What does a debt ratio of 40% indicate? - ✔✔It indicates that 40% of assets are financed by debt.
What does a net margin of 7% indicate? - ✔✔For every dollar of revenue, 7 cents remain for the equity
holders after all other costs are covered.
What does an average collection period of 70 tell you? - ✔✔On average, a firm takes 70 days to collect
accounts receivable.
What does high inventory turnover relative to the industry and competitors indicate? - ✔✔The firm
does not hold enough inventory and is making its customers wait longer to receive their purchased
goods.
What does inventory turnover assess? - ✔✔The inventory management of a firm
What is operating margin useful for? - ✔✔Comparing the profitability of firms with different capital
structures
What is the difference between return on assets (ROA) and return on equity (ROE)? - ✔✔ROE considers
the capital structure of a company, while ROA does not.
