Question

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. Justify your response.

a. The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
b. The division's basic earning power ratio is above the average of other firms in its industry
c. The division's total assets turnover ratio is below the average for other firms in its industry
d. The division's debt ratio is above the average for other firms in the industry.

Answer 1

Answer:

The correct option here is B)

A Division manager is much more likely to receive a better grade if it's basic earning power ratio is above the average of other firms in its industry.

Explanation:

Basic Earning Power (BEP) ratio is a financial metric that estimates the earning capacity of business before tax and other leverages are deducted or taken into consideration.

To calculate your BEP ratio, you divide Earning Before Interest and Taxes (EBIT) by the total assets.

A higher BEP shows that the manager is better than other firms at using its assets to generate income.

Equity analysts always assess a company’s BEP before making the decision to invest. Simply put, the BEP shows them if a company’s stock is worth investing in.

Cheers!

Answer 2

The situation that would like cause the manager receive a better grade is rage for its competitors is the division's basic earning power ratio is above the average of other firms in its industry.

All things being equal, more earning is preferred to less earning. So, if the earning power of the manager is above the average of other firms in its industry, this is a positive consideration.

Days of sales outstanding is an activity ratio.  It measures the efficiency with which a division collects its receivables.  The faster it is for a firm to collect its receivables, the more efficient it is.

The higher the turnover ratio, the more efficient the firm is. If the  division's total assets turnover ratio is below the average for other firms in its industry. it is a negative indicator.

High debt ratios indicate a higher level of financial risk and weaker solvency. This means that if the  division's debt ratio is above the average for other firms in the industry, it is a negative indicator.

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