1.Which of the following transactions will increase a corporation\'s operating r
ID: 2601383 • Letter: 1
Question
1.Which of the following transactions will increase a corporation's operating return on assets? A) sell stock and use the money to pay off some long-term debt B) sell 10-year bonds and use the money to pay off current liabilities negotiate a new contract that lowers raw material costs by 10% increase sales by 10% 2. In an ideal world, which of the following would be used to evaluate firm performance? A) book value of assets B) corporate retained earnings from the day of incorporation accounting assets and profits )market value of assets 3. All of the following measure liquidity except A) current ratio. B) inventory turnover acid-test ratio DPoperating return on assets. 4. Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of S6 million. William's inventory balance is A) S2,000,000. $2,400,000 C) $4,000,000. D) $4,800,000.Explanation / Answer
1. Operating return on assets is calculated by dividing the operating profits or Earnings before iinterest and Tax by Average assets of the company. If company wants to increase it's operating income, then it should either increase operating profit or reduce the assets.
a. if company sells it's stock and pay debt then the company will be able to reduce it's interest expense. But for operating return on assets we take EBIT as numerator which is before deducting the interest. This means this transaction as no impact on operating return on assets.
b. If company issues bonds then such amount will lead to only increase in interest expense and will not impact either the assets or EBIT.
c. If raw materials cost is lowered than the company will be generating more EBIT as cost of goods sold will decrease. This transaction will have positive impact on operating return on assets.
d. If sales increase by 10% then clearly, company will be able to generate more EBIT and hence increase in operating return on assets.
Correct Answers are C & D. Since the question asks which transactions, i am assuming more than one answer to be correct.
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