FSA EXAM WITH 100% CORRECT
ANSWERS Latest Update 2024
MODULE 3 - answer-MODULE 3
Describe the concept of asset turnover. What does the concept mean and why is it
so important to understanding and interpreting financial performance? - answer-
Asset turnover measures the amount of revenue compared with the investment in an
asset. AT measures productivity. When AT increase, ROA increases, which causes
ROE to increase, which increases shareholder value.
(a) Explain how an increase in financial leverage can increase a company's ROE. (b)
Given the potentially positive relation between financial leverage and ROE, why don't
we see companies with 100% financial leverage (entirely nonowner financed)? -
answer-(a) Increasing leverage increases ROE as long as the assets earn a greater
operating return than the cost of the additional debt
(b) As FL increases so does the risk of bankruptcy and default. We don't see 100%
FL because that would pose too much risk a company
Explain what it means when a company's ROE exceeds its RNOA. What about when
the reverse occurs? - answer-An ROE that exceeds RNOA implies a positive return
on nonoperating activities. This results from borrowed funds being invested in
operating assets whose return (RNOA) exceeds the cost of borrowing. In this case,
borrowing money increases ROE.
When the reverse occurs, the company has net nonoperating assets (nonoperating
assets > nonoperating liabilities). This is "negative" net nonoperating obligations in
the ROE disaggregation.
Discontinued operations are typically viewed as a nonoperating activity in the
analysis of the balance sheet and the income statement. What is the rationale for
this treatment? - answer-Because income derived from discontinued operations is no
longer coming from a source that is a basic part of how the company operate
What analysis challenge arises when a company's equity is negative? What can be
done to meet the challenge? - answer-When equity is negative, ratios that include
equity, are uninterpretable. This includes the all-important ratio, return on equity,
ROE. We can add back the book value of Treasury stock to both total equity and
total assets and recalculate any ratios involving those measures.
MODULE 4 - answer-MODULE 4
Companies often borrow money to fund operating activities. Why do lenders
distinguish between cyclical cash needs and cash needed to fund operating losses?
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ANSWERS Latest Update 2024
MODULE 3 - answer-MODULE 3
Describe the concept of asset turnover. What does the concept mean and why is it
so important to understanding and interpreting financial performance? - answer-
Asset turnover measures the amount of revenue compared with the investment in an
asset. AT measures productivity. When AT increase, ROA increases, which causes
ROE to increase, which increases shareholder value.
(a) Explain how an increase in financial leverage can increase a company's ROE. (b)
Given the potentially positive relation between financial leverage and ROE, why don't
we see companies with 100% financial leverage (entirely nonowner financed)? -
answer-(a) Increasing leverage increases ROE as long as the assets earn a greater
operating return than the cost of the additional debt
(b) As FL increases so does the risk of bankruptcy and default. We don't see 100%
FL because that would pose too much risk a company
Explain what it means when a company's ROE exceeds its RNOA. What about when
the reverse occurs? - answer-An ROE that exceeds RNOA implies a positive return
on nonoperating activities. This results from borrowed funds being invested in
operating assets whose return (RNOA) exceeds the cost of borrowing. In this case,
borrowing money increases ROE.
When the reverse occurs, the company has net nonoperating assets (nonoperating
assets > nonoperating liabilities). This is "negative" net nonoperating obligations in
the ROE disaggregation.
Discontinued operations are typically viewed as a nonoperating activity in the
analysis of the balance sheet and the income statement. What is the rationale for
this treatment? - answer-Because income derived from discontinued operations is no
longer coming from a source that is a basic part of how the company operate
What analysis challenge arises when a company's equity is negative? What can be
done to meet the challenge? - answer-When equity is negative, ratios that include
equity, are uninterpretable. This includes the all-important ratio, return on equity,
ROE. We can add back the book value of Treasury stock to both total equity and
total assets and recalculate any ratios involving those measures.
MODULE 4 - answer-MODULE 4
Companies often borrow money to fund operating activities. Why do lenders
distinguish between cyclical cash needs and cash needed to fund operating losses?
Ask for various Exams or Study materials from
()
