Review Questions 1. Describe the "five-question approach" to using financial ratios. 2. What are the limitations of industry average ratios? Discuss briefly. 3. Distinguish between a firm's operating return on assets and its operating profit margin. 4. What is Economic Value Added? Why is it used? 5. What is the time value of money? Why is it so important? 6. What is an annuity? Give some examples of annuities. Distinguish between an annuity and a perpetuity. 7. What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk (market or nondiversifiable risk)? 8. If we were to graph the returns of a stock against the returns of the S&P 500 Index, and the points did not follow a very ordered pattern, what could we say about that stock? If the stock's returns tracked the S&P 500 returns very closely, then what could we say? 9. Over the past eight decades, we have had the opportunity to observe the rates of return and the variability of these returns for different types of securities. Summarize these observations. 1