Selected information for a company and its industry’s average return on equity(ROE)is provided:
Financial Report:Forecasts
Which of the following is most likely a contributor to the company’s inferior ROE compared with that of the industry?The company’s lower:
A、financial leverage.
B、tax burden ratio.
C、interest burden ratio.
【Answer to question 1】A
【analysis】
A is correct.Compare the three specified components from the five-way DuPont analysis:
Financial Report:Forecasts
The lower financial leverage ratio relative to the industry is one of the causes of the company’s poor relative performance.
B is incorrect,as per table.C
is incorrect,as per table.
Questions 2:
When forecasting earnings,an analyst’s best approach is to:
A、establish a precise forecast based on the results of economic and financial analysis.
B、calculate a range of possibilities based on the results of financial analysis.
C、utilize the results of financial analysis and professional judgment.
【Answer to question 2】C
【analysis】
C is correct.Forecasts are not limited to a single point estimate but should involve a range of possibilities.The results of financial analysis are integral to this process,along with judgment of the analysts.
A is incorrect.Forecasts should involve a range of possibilities and should not be based solely on economic and financial analysis.
B is incorrect.While analysts should derive a range of possibilities,they should not rely solely on financial analysis.
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