Q1. Review Corporations A through E on page 113. All corporations have the same amount of (______________ / ______________ / ______________ / Liabilities / Stockholders’ equity), but different amounts of (Sales revenue / Net income / Assets / ______________ / ______________). Corp A has the (______________ / greatest) amount of liabilities, whereas Corp E has the (least / ______________) amount of liabilities.
Q2. Compute the ratios for Corp C, Corp D, and Corp E and record in the DuPont Analysis of ROE chart on page 116. As liabilities increase (______________ / ______________ / ______________ / financial leverage / ROE / Debt) ratios remain the same, but the (ROS / Asset turnover / ROA / ______________ / ______________/ ______________) ratios increase.
Financial Leverage Ratio = Assets / SE
Debt Ratio = Liabilities / Assets
Because A = L + SE you can convert:
Financial Leverage Ratio = 1 / (1 - Debt Ratio)
Q3. Corp D has a debt ratio of 75%, which results in Financial Leverage of (2 / ___ / 25), therefore, ROE is (2 / ___ / 25) times greater than ROA.
Corp A has no debt, therefore, ROA (< / = / > ) ROE.
Q4. Higher debt results in a (______________ / lower) debt ratio, which leads to (______________ / lower) Financial Leverage, which results in higher (ROA / ______________) because shareholders are assuming (______________ / lower) risk.
Q5. In the Primary Driver chart on the previous page:
a. Circle the Primary Driver of ROA as either ROS or Asset Turnover.
b. Circle the Primary Driver of ROE as either ROA, Financial Leverage, or of equal (=) contribution.
Q6a. The primary driver of ROA remains the same because (______________ / ______________ / ______________ / liabilities) remain the same.
b. The primary driver of ROE changes because (sales revenue / expenses / assets / ______________) change.
Q7. What is the primary driver of ROE when the debt ratio is:
a. Less than 50%? (_________ / = / LEV)
b. Equal to 50%? (_________ / = / LEV)
c. Greater than 50%? (ROA / = / ___________)