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

Answer:

B.The division's basic earning power ratio is above the average of other firms in its industry

Explanation:

Because The division having Earning Power ratio( EBIT/Total Assets) better than the average of other firms in the industry that means that the firm is using the assets more efficently than the other firms.

Other options are not valid as the total Asset Turnover ratio, Inventory Turnover ratio, DSO are worse than the industry average and the Debt/CApital ratio higher than industry average that means the firm is having a higher risk of leverage. So these factors cannot give a better grade to the division manager.

Only Option b is the perofrmance criterion that will give a better grade to the division manager.