Financial Management MCQ Questions and Solutions with Explanations | Commerce

Profit margin multiply assets turnover multiply equity multiplier is used to calculate return on equity. Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.

Company low earning power and high interest cost cause financial changes which have high return on assets. The higher the ROA number, the better, because the company is earning more money on less investment.

Ratios which relate firm's stock to its book value per share, cash flow and earnings are classified as market value ratios. Market value ratios are used to evaluate the current share price of a publicly-held company's stock.

An equation in which total assets are multiplied to profit margin is classified as du DuPont equation. In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by financial leverage. Under DuPont analysis, return on equity is equal to the profit margin multiplied by asset turnover multiplied by financial leverage.

Price earning ratio and price by cash flow ratio are classified as market value ratios. Market value ratios are used to evaluate the current share price of a publicly-held company's stock.

Return on assets (ROA) shows how efficiently a company uses its assets to generate earnings. It's calculated as Net Income divided by Total Assets.

Return on equity (ROE) shows how well a company uses shareholder investments to generate profit. It's calculated as Net Income divided by Shareholder Equity (Common Equity in this case).

We are given ROA = 5.5%, Total Assets = Rs 3,000, and Common Equity = Rs 1,050.

First, let's find the Net Income using the ROA formula: ROA = Net Income / Total Assets

0.055 = Net Income / 3000

Net Income = 0.055 * 3000 = Rs 165

Now, we can calculate the ROE using the Net Income we just found:

ROE = Net Income / Common Equity

ROE = 165 / 1050

ROE = 0.1571 or 15.71%

Therefore, the correct answer is Option B: 15.71%. The other options are incorrect calculations or units.

Return on assets = Total assets turnover × Profit margin
= 1.8% × 4.5% = 8.10%

High price to earning ratio shows company's high growth prospect. The price-to-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings.

Return on equity = Return on assets × Equity multiplier
= 6.7% × 2.5% = 16.75%