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The lesson presents one way of computing the rate of return using a two-factor decomposition equivalent to EBIT/Assets. Which decomposition is presented in the lesson?
Answer & Solution
Correct answer: B.
1. The lesson presents an alternative decomposition for return on assets.
2. The decomposition is (EBIT / Sales) × (Sales / Assets) = EBIT / Assets.
3. The first term is the operating margin and the second is the assets turnover.
4. Their product simplifies to EBIT divided by Assets, which is the return on assets ratio.
5. The other expressions are not algebraically equivalent decompositions.
_Source: ICSI CS Executive Paper 8 (Financial and Strategic Management) — Lesson 1: Nature, Significance and Scope of Financial Management, pp. 6-20._
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