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Measures for profitability, operating cycle

Please discuss:

1. Which is a more meaningful measure of profitability for a firm, Return on Assets or Return on Equity? Why?

2. There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

3. Why is the buyer's operating cycle considered to be an appropriate upper limit for the credit period? Define what is the operating cycle. Wouldn't the buyer's inventory period be a better target?

Solution Preview

1. Return on Equity measures the return generated on the money invested by the equity holders. When we are talking about a firm as a whole, the capital invested would be by the debt holders and the equity holders. This total capital is represented by the Total Assets of the firm, since Total Assets is equal to the Total Liabilities. Therefore profitability of the firm would be measured by the total capital employed by the firm which is equal to the total assets of the firm and a more ...

Solution Summary

The solution explains the best measure for profitability, the factors affecting annuity and the a discussion on operating cycle