Question 27 What does a fixed asset turnover of 35 times mea

Question 27 What does a fixed asset turnover of 3.5 times mean (think intuitive interpretation)? For each $1 of sales generated the firm has total assets of $3.50 For each $1 of total assets, the firm generated $3.50 in sales. For each $1 of total assets, the firm generated $3.50 in net income. For each $1 of fixed assets, the firm generated of $3.50 in sales. The firm completely replaces its fixed assets 2.5 times each year, on average. O O

Solution

27.

Given Fixed assets turover = 3.5

Fixed assets turnover = Net sales/Net fixed assets

Fixed assets turover ratio expresses the relationship between sales and fixed assets i.e. how are fixed asets utilized to generate sales. Higher the fixed assets turnover ratio, better it is.

If fixed assets turover is 3.5, it means that for each $1 of fixed assets, the firm generated $3.5 in sales. Hence, the correct option is (d)

26.

Given operating margin = 0.35

Operating margin = EBIT/Sales

Operating margin ratio expresses the relationship between operating profits of a firm and its sales. Higher the operating margin ratio, better it is for a firm.

Operating margin of 0.35 indicattes that operating profits of the firm are 35% of its sales i.e. for each $1 sales, firm earns 35 cents in EBIT.

Hence, the correct option is (e)

25.

Free cash flow is a measure of how much cash a business generates after accounting for capital expenditures such as building or equipment purchased. This free cash can be used for variious purposes such as expansion, dividends, repayment of debt etc. Hence, this is free cash, even if it is withdrawn out of the business, it will not adversely affect the working of the business. Hence, it can be rightly said that free cash flow is the amount of cash that can be pulled out of the organization without harming its ability to operate.

Hence, the correct option is (c)