Answer to Question 1
D
Answer to Question 2
The most frequently encountered profit objectives for a retailer are shown in the strategic profit model (SPM), a tool used to assess a firm's profitability. The five elements of the SPM elements include net profit margin, asset turnover, return on assets, financial leverage, and return on net worth.
Net profit margin is the ratio of net profit (after taxes) to net sales. It shows how much profit a retailer makes on each dollar of sales after all expenses and taxes have been met.
Asset turnover is computed by taking the retailer's annual net sales and dividing by total assets. This ratio shows how productively the firm's assets are being used.
Return on assets (ROA), which is annual net profit divided by total assets, depicts the net profit return the retailer achieved on all assets invested regardless of whether the assets were financed by creditors or by the firm's owners. ROA is the result of multiplying the net profit margin by asset turnover.
Financial leverage is total assets divided by net worth or owners' equity. This ratio shows the extent to which a retailer is using debt in its total capital structure.
Return on net worth (RONW) is net profit divided by net worth or owner's equity. Return on net worth is usually used to measure owner's performance. The ROA multiplied by financial leverage yields RONW.
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