Tutorial answers 3 - AFE 2206 Tutorial 3. Week 5 Answers...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
AFE 2206 Tutorial 3. Week 5 Answers Chapter 10 Question 5, p.348 Business risk is measured by the relative variability (i.e., the coefficient of variation) of operating earnings for a firm over time. In turn, the variability of operating earnings is a function of sales volatility and the amount of operating leverage (i.e., fixed costs of production) employed by the firm. Sales variability is the prime determinant of earnings volatility. In addition, the greater the firm’s operating leverage, the more variable the operating earnings series will be relative to the sales variability. Question 11, p.348 Assuming the risk of the firm is not abnormally high, a 24% ROE is quite high and probably exceeds the return that the equity investor could earn on the funds. Therefore, the firm should retain their earnings and invest them at this rate. Alternatively, if this firm has excess cash and expects to continue generating excess cash (such as Microsoft in 2003) it may decide to initiate or increase a cash dividend. Question 15, p.348 (see p. 346) Student exercise, so answers will depend upon what limitations the student chooses to discuss. Some possibilities are: Flexibility in choosing which GAAP to use and how to apply them Comparing firm’s ratios to industry averages when there is wide variation among individual firm’ ratios within the industry or when the firm under analysis has a unique component.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/09/2009 for the course ACCOUNTING 2206AFE taught by Professor Alexandrakimov during the Three '08 term at Griffith.

Page1 / 5

Tutorial answers 3 - AFE 2206 Tutorial 3. Week 5 Answers...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online