When Using Financial Ratios to Analyze a Company's Ability to Maximize

question 25

Multiple Choice

When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____.

• A) financial ratios are flags indicating potential areas of strength or weakness
• B) a financial ratio must be dissected to discover its true meaning
• C) a financial ratio must be compared to some standard
• D) although there may be accounting differences between companies, these differences do not impact financial ratios

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Definitions:

Straight-Line Depreciation

A way to distribute the outlay of a tangible resource over its service life in regular annual contributions.

Tax Rate

The percentage at which an individual or corporation is taxed on their income or profits.

After-Tax Net Income

The amount of profit left after all taxes have been deducted from total revenue.

Payback Period

The length of time it takes for an investment to recover its initial cost, used in capital budgeting to assess investment viability.