ACG 3171 Exam 2 G. Wilson(with solved solutions)
Difference between bias and noise correct answers -Bias is anything that reduces the randomness
of the sample being tested. Anything that affects a decision other than facts.
-Noise is the different biases and predispositions that can unconsciously shape how we interpret
messages.
-Bias creates noise
Know the difference between ROA and ROCE correct answers -ROA measures a firm's success
in using assets to generate earnings (independent of the financing) of those assets.
-Return on common equity (ROCE) measures the return to common shareholders after
subtracting operating expenses, cost of financial debt, and preferred stock from revenues.
-ROCE is a more complete measure of firm performance because it incorporates the results of a
firm's operating, investing, and financing decisions.
Understand the tradeoff between asset turnover and profit margin correct answers -Profit margin
for ROA captures the overall profitability of a firm's operations and is measured as the amount of
after-tax profit generated (before financing costs) as a percentage of sales
-Total assets turnover captures how EFFICIENTLY the firm utilizes assets to generate revenues.
Higher revenues generated with a given level of assets indicate more efficient use of those assets.
Know the types and examples of risk required in the item 1A risk disclosure correct answers
Understand the differences between current ratio and quick ratio correct answers -Current ratio
indicates the amount of cash available at the balance sheet date plus the amount of other current
assets the firm expects to convert into cash within one year of the balance sheet date relative to
obligations coming due during the same period.
-Large current ratios indicate substantial amounts of current assets are available to repay
obligations coming due within the next year. Small ratios may raise concerns that current assets
may not be sufficient to repay short-term obligations. CA/CL
-Quick ratio (acid-test ratio), includes only those current assets the firm could convert quickly
into cash, often interpreted as within 90 days, in the numerator:
-The quick ratio should be interpreted in the context of the many other factors that affect a firm's
liquidity. Cash and equivalents + short-term invest + acc receiv / CL
Understand what beta represents correct answers Beta is a measure of the systematic (or
undiversifiable) risk of the firm.
Difference between bias and noise correct answers -Bias is anything that reduces the randomness
of the sample being tested. Anything that affects a decision other than facts.
-Noise is the different biases and predispositions that can unconsciously shape how we interpret
messages.
-Bias creates noise
Know the difference between ROA and ROCE correct answers -ROA measures a firm's success
in using assets to generate earnings (independent of the financing) of those assets.
-Return on common equity (ROCE) measures the return to common shareholders after
subtracting operating expenses, cost of financial debt, and preferred stock from revenues.
-ROCE is a more complete measure of firm performance because it incorporates the results of a
firm's operating, investing, and financing decisions.
Understand the tradeoff between asset turnover and profit margin correct answers -Profit margin
for ROA captures the overall profitability of a firm's operations and is measured as the amount of
after-tax profit generated (before financing costs) as a percentage of sales
-Total assets turnover captures how EFFICIENTLY the firm utilizes assets to generate revenues.
Higher revenues generated with a given level of assets indicate more efficient use of those assets.
Know the types and examples of risk required in the item 1A risk disclosure correct answers
Understand the differences between current ratio and quick ratio correct answers -Current ratio
indicates the amount of cash available at the balance sheet date plus the amount of other current
assets the firm expects to convert into cash within one year of the balance sheet date relative to
obligations coming due during the same period.
-Large current ratios indicate substantial amounts of current assets are available to repay
obligations coming due within the next year. Small ratios may raise concerns that current assets
may not be sufficient to repay short-term obligations. CA/CL
-Quick ratio (acid-test ratio), includes only those current assets the firm could convert quickly
into cash, often interpreted as within 90 days, in the numerator:
-The quick ratio should be interpreted in the context of the many other factors that affect a firm's
liquidity. Cash and equivalents + short-term invest + acc receiv / CL
Understand what beta represents correct answers Beta is a measure of the systematic (or
undiversifiable) risk of the firm.
