Financial Accounting Quiz: Profitability Ratios
20 questions · exam conditions
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Profitability RatiosQuestion 1 of 20

A company has a net profit margin of 8% and a total asset turnover of 1.5. Its debt-to-equity ratio is 0.5. What is the company's return on equity (ROE)?

6.0%
12.0%
18.0%
24.0%
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Financial Accounting Quiz

Financial Accounting Quiz: Profitability Ratios

Practice Profitability Ratios in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Profitability Ratios, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A company has a net profit margin of 8% and a total asset turnover of 1.5. Its debt-to-equity ratio is 0.5. What is the company's return on equity (ROE)?

  1. 6.0%
  2. 12.0%
  3. 18.0% (correct answer)
  4. 24.0%
Explanation: The correct answer is 18.0%. This is a multi-step problem using the DuPont framework and requiring conversion of the debt-to-equity ratio to the financial leverage ratio.
  1. Calculate Return on Assets (ROA): ROA = Net Profit Margin × Total Asset Turnover = 8% × 1.5 = 12.0%.
  2. Convert Debt-to-Equity ratio to Financial Leverage (Assets/Equity): If D/E = 0.5, then D = 0.5E. Since Assets = Debt + Equity, then A = 0.5E + E = 1.5E. Therefore, the financial leverage ratio A/E = 1.5E / E = 1.5.
  3. Calculate ROE: ROE = ROA × Financial Leverage = 12.0% × 1.5 = 18.0%. Distractor B (12.0%) is the ROA, but fails to apply the leverage component. Distractor A (6.0%) incorrectly multiplies ROA by the D/E ratio (12% * 0.5). Distractor D (24.0%) results from incorrectly calculating financial leverage, perhaps by using a leverage of 2.0 (12% * 2.0).

Question 2

Two companies, LuxCo and UtilCo, have the same return on assets (ROA) of 10%. LuxCo has a financial leverage ratio (Assets/Equity) of 3.0, while UtilCo has a financial leverage ratio of 1.5. Both companies are profitable. Which of the following statements is most accurate?

  1. LuxCo and UtilCo have the same return on equity (ROE).
  2. LuxCo has a higher net profit margin than UtilCo.
  3. UtilCo's ROE is double the ROE of LuxCo.
  4. LuxCo's ROE is double the ROE of UtilCo. (correct answer)
Explanation: The correct answer is B. This question tests the understanding of the leverage component of the DuPont formula (ROE = ROA × Financial Leverage).
  1. Calculate LuxCo's ROE: ROE = ROA × Leverage = 10% × 3.0 = 30%.
  2. Calculate UtilCo's ROE: ROE = ROA × Leverage = 10% × 1.5 = 15%. Comparing the two, LuxCo's ROE (30%) is exactly double UtilCo's ROE (15%). Distractor A is incorrect because the different leverage ratios lead to different ROEs. Distractor C has the relationship reversed. Distractor D cannot be concluded from the information given; we only know about their ROA and leverage, not the composition of their ROA (profit margin vs. asset turnover).

Question 3

A company has gross sales of $2,500,000, sales returns and allowances of $100,000, and cost of goods sold of $1,400,000. Its net income for the period was $216,000. What is the company's net profit margin?

  1. 8.6%
  2. 9.0% (correct answer)
  3. 15.4%
  4. 41.7%
Explanation: The correct answer is 9.0%. The key is to use net sales as the denominator for the profit margin calculation, not gross sales.
  1. Calculate Net Sales: Net Sales = Gross Sales - Sales Returns and Allowances = $2,500,000 - $100,000 = $2,400,000.
  2. Calculate Net Profit Margin: Net Profit Margin = Net Income / Net Sales = $216,000 / $2,400,000 = 0.09 or 9.0%. Distractor A (8.6%) is a common error where the calculation uses gross sales in the denominator ($216,000 / 2,500,000).DistractorC(15.42,500,000). Distractor C (15.4%) calculates the profit margin using an incorrect numerator, perhaps income before interest and taxes. Distractor D (41.7%) calculates the gross profit margin on net sales ((2.4M - 1.4M)/1.4M)/2.4M), not the net profit margin.

Question 4

A company reports the following information for its most recent fiscal year: Sales revenue of $6,000,000; Cost of goods sold of $3,000,000; Selling, general & administrative expenses of $1,500,000; Interest expense of $300,000; and a pre-tax gain on the sale of equipment of $200,000. The company's effective tax rate is 30%. What is the company's net profit margin?

  1. 14.0%
  2. 16.3% (correct answer)
  3. 20.0%
  4. 23.3%
Explanation: The correct answer is 16.3%. The calculation requires determining net income first, then dividing by sales revenue.
  1. Calculate Earnings Before Tax (EBT): EBT = Sales - COGS - SG&A - Interest Expense + Gain on Sale. EBT = $6,000,000 - $3,000,000 - $1,500,000 - $300,000 + $200,000 = $1,400,000.
  2. Calculate Tax Expense: Tax Expense = EBT × Tax Rate = $1,400,000 × 0.30 = $420,000.
  3. Calculate Net Income: Net Income = EBT - Tax Expense = $1,400,000 - $420,000 = $980,000.
  4. Calculate Net Profit Margin: Net Profit Margin = Net Income / Sales Revenue = $980,000 / $6,000,000 = 0.1633 or 16.3%. Distractor A (14.0%) results from excluding the gain on sale in the calculation. Distractor C (20.0%) results from calculating profit margin before interest expense. Distractor D (23.3%) is the pre-tax profit margin ($1,400,000 / $6,000,000).

Question 5

Apex Corporation's return on equity (ROE) is 22.5%. The company's financial leverage, measured as average total assets divided by average total equity, is 1.8. Its total asset turnover is 1.25. Based on the DuPont analysis, what is Apex Corporation's net profit margin?

  1. 10.0% (correct answer)
  2. 12.5%
  3. 18.0%
  4. 31.3%
Explanation: The correct answer is 10.0%. The DuPont formula is: ROE = Net Profit Margin × Total Asset Turnover × Financial Leverage. We are given ROE = 22.5%, Asset Turnover = 1.25, and Financial Leverage = 1.8. 0.225 = Net Profit Margin × 1.25 × 1.8 0.225 = Net Profit Margin × 2.25 Net Profit Margin = 0.225 / 2.25 = 0.10, or 10.0%. Distractor B (12.5%) is ROE divided by leverage (22.5% / 1.8). Distractor C (18.0%) is ROE divided by asset turnover (22.5% / 1.25). Distractor D (31.3%) incorrectly multiplies ROE by asset turnover (22.5% * 1.25 / 1.8) or another algebraic error.

Question 6

A profitable company with a debt-to-assets ratio of 30% issues new long-term bonds and uses the entire proceeds to repurchase a significant number of its outstanding common shares. Assume the after-tax cost of the new debt is 5%, while the company's return on assets (ROA) is currently 8%. Which of the following is the most likely immediate consequence of this transaction?

  1. Return on assets will increase, and return on equity will increase.
  2. Return on assets will decrease, and return on equity will increase. (correct answer)
  3. Return on assets will decrease, and return on equity will decrease.
  4. Return on assets will remain unchanged, while return on equity will increase.
Explanation: The correct answer is that ROA will decrease, and ROE will increase. Here's the analysis:
  1. Effect on ROA (Net Income / Average Assets): Issuing debt and repurchasing stock are offsetting transactions for total assets (cash comes in from debt, cash goes out for stock), leaving total assets unchanged. However, net income will decrease due to the new after-tax interest expense. Therefore, ROA must decrease.
  2. Effect on ROE (Net Income / Average Equity): Net income decreases, but shareholders' equity decreases by a larger amount (the full value of the repurchase). Financial leverage (Assets/Equity) increases. Since the company is earning more on its assets (ROA = 8%) than the after-tax cost of the debt it used for the repurchase (5%), the transaction is accretive to shareholders. The increase in leverage will more than offset the decline in net income, causing ROE to increase.

Question 7

A company's return on equity (ROE) increased from 15% to 18% in one year. However, its return on assets (ROA) declined from 10% to 9% during the same period. Which of the following is the most logical explanation for these divergent trends?

  1. The company improved its control over operating expenses, leading to a higher net profit margin.
  2. The company utilized its assets more efficiently, resulting in a higher total asset turnover.
  3. The company increased its use of debt financing, resulting in higher financial leverage. (correct answer)
  4. The company issued a large number of new shares to finance expansion.
Explanation: The correct answer is that the company increased its use of debt financing. The relationship between ROE and ROA is defined by the DuPont framework, where ROE = ROA × Financial Leverage. Financial Leverage = Average Assets / Average Equity. Given ROE increased while ROA decreased, the financial leverage multiplier must have increased significantly to offset the decline in ROA and produce a higher ROE. An increase in debt financing relative to equity increases financial leverage. Distractors A and B are incorrect because an improvement in profit margin or asset turnover would increase ROA, which contradicts the premise. Distractor D is incorrect because issuing new shares would decrease financial leverage, which would cause ROE to decrease relative to ROA.

Question 8

During a period of continuously rising inventory costs, a company changes its inventory valuation method from LIFO to FIFO. Assuming the company is profitable and has a stable sales volume, what is the most likely effect of this change on its net profit margin and return on assets (ROA) in the year of the change?

  1. Net profit margin will increase, and ROA will increase. (correct answer)
  2. Net profit margin will increase, but the effect on ROA is indeterminate.
  3. Net profit margin will decrease, and ROA will decrease.
  4. Net profit margin will decrease, but the effect on ROA is indeterminate.
Explanation: The correct answer is that both net profit margin and ROA will increase. In a period of rising prices, switching from LIFO to FIFO has the following effects:
  1. Cost of Goods Sold (COGS) will be lower because older, cheaper inventory is assumed to be sold first.
  2. Gross profit, pre-tax income, and net income will be higher.
  3. Ending inventory on the balance sheet will be higher (valued at more recent, higher costs), leading to higher total assets.
  4. Net Profit Margin (Net Income / Sales): The numerator (Net Income) increases while the denominator (Sales) is unchanged. Thus, the profit margin increases.
  5. Return on Assets (Net Income / Average Assets): The numerator (Net Income) increases. The denominator (Average Assets) also increases due to higher inventory values. However, the percentage increase in net income is typically greater than the percentage increase in average assets, leading to an increase in ROA. Therefore, it is most likely that ROA will also increase.

Question 9

A retail company's management wants to increase its return on equity (ROE) from 12% to 15%. Its current net profit margin is 5%, and its financial leverage (assets/equity) is 2.0. To achieve the target ROE of 15% solely by improving its asset efficiency, what must its new total asset turnover ratio be?

  1. 1.25
  2. 1.50 (correct answer)
  3. 1.75
  4. 2.00
Explanation: The correct answer is 1.50. This problem uses the DuPont framework (ROE = Profit Margin × Asset Turnover × Financial Leverage) to solve for a target component.
  1. Identify the knowns and the target: Target ROE = 15% (0.15), Profit Margin = 5% (0.05), Financial Leverage = 2.0.
  2. Set up the DuPont equation with the target ROE and solve for the unknown Asset Turnover (AT): 0.15 = 0.05 × AT × 2.0 0.15 = 0.10 × AT AT = 0.15 / 0.10 = 1.50. Distractor A (1.25) results from an arithmetic error. Distractor C (1.75) is another arithmetic error. Distractor D (2.00) might be chosen by confusing leverage with the target turnover.

Question 10

Company A and Company B operate in the same industry. Company A has a return on equity (ROE) of 20%, while Company B has an ROE of 18%. An analyst concludes Company A is more profitable. Which of the following statements, if true, would most seriously weaken the analyst's conclusion?

  1. Company A's net profit margin is 4%, while Company B's is 7%. (correct answer)
  2. Company A has a higher total asset turnover ratio than Company B.
  3. Company A's market share is larger than Company B's market share.
  4. Company A has a lower cost of goods sold as a percentage of sales.
Explanation: The correct answer is A. A higher ROE does not automatically mean better core profitability. ROE is driven by profitability (profit margin), efficiency (asset turnover), and leverage. If Company A has a much lower profit margin (4%) than Company B (7%), it suggests Company B has better control over its costs or better pricing power. Company A's higher ROE must be achieved through higher asset turnover or, more riskily, higher financial leverage. A lower profit margin indicates weaker underlying profitability, thus weakening the conclusion that A is unequivocally 'more profitable'. Distractor B supports the idea that A is a better performer (more efficient). Distractor C (market share) is not directly related to the components of profitability in the DuPont analysis. Distractor D indicates A has better cost control, which would strengthen, not weaken, the conclusion.

Question 11

An analyst observes that a company's gross profit margin has remained stable for three years, but its net profit margin has declined steadily over the same period. Which of the following is the most plausible explanation for this trend?

  1. The company's cost of goods sold has increased as a percentage of sales.
  2. The company has engaged in aggressive price-cutting to gain market share.
  3. The company's interest expense and effective tax rate have been increasing. (correct answer)
  4. The company has successfully implemented a cost-control program for its factory operations.
Explanation: The correct answer is C. Net profit margin is calculated after all expenses, including operating expenses, interest, and taxes, are deducted from revenue. Gross profit margin only considers the cost of goods sold. If the gross margin is stable, it means the relationship between sales and COGS is unchanged. Therefore, the decline in the net profit margin must be due to increases in expenses that fall between gross profit and net income. Increasing interest expense (from higher debt) and a higher effective tax rate would both reduce net income without affecting gross profit, thus causing the net profit margin to decline. Distractors A and B would cause the gross profit margin to decline, which contradicts the premise. Distractor D describes an action that would improve margins, not cause them to decline.

Question 12

A company is considering a major capital investment in new, highly efficient manufacturing equipment. The project will be financed entirely with new long-term debt. Assuming the project is undertaken and the equipment is placed into service on the first day of the year, what is the most likely immediate impact on the company's return on assets (ROA) for that year?

  1. ROA will increase, as the new equipment is more efficient.
  2. The impact on ROA cannot be determined without knowing the interest rate on the new debt.
  3. ROA will remain unchanged, as the increase in earnings will exactly offset the increase in assets.
  4. ROA will decrease, because total assets increase immediately while net income benefits accrue over time. (correct answer)
Explanation: The correct answer is B. ROA is calculated as Net Income / Average Total Assets.
  1. Impact on Assets: The capital investment immediately increases the total assets on the balance sheet. This increases the denominator of the ROA ratio from the start of the year.
  2. Impact on Net Income: The numerator (Net Income) will be affected by two things: new depreciation expense on the equipment and new interest expense on the debt. Both of these are expenses that reduce net income. While the equipment's efficiency may lead to lower operating costs and eventually higher income, these benefits accrue over time and are unlikely to fully offset the new depreciation and interest expenses, especially in the first year. Therefore, the denominator (Assets) increases significantly and immediately, while the numerator (Net Income) is likely to decrease or increase only slightly. This combination will cause ROA to decrease in the short term.

Question 13

Galvan Industries reported net income of $450,000 for the year. The company's return on assets (ROA) was 12.5%. At the beginning of the year, total assets were $3,400,000. What was the company's total asset balance at the end of the year?

  1. $3,600,000
  2. $3,700,000
  3. $3,800,000 (correct answer)
  4. $4,000,000
Explanation: The correct answer is $3,800,000. This is a multi-step problem that requires working backwards.
  1. Use the ROA formula to find Average Total Assets: ROA = Net Income / Average Total Assets. So, Average Total Assets = Net Income / ROA = $450,000 / 0.125 = $3,600,000.
  2. Use the formula for Average Total Assets to find Ending Total Assets: Average Total Assets = (Beginning Assets + Ending Assets) / 2. 3,600,000=(3,600,000 = (3,400,000 + Ending Assets) / 2.
  3. Solve for Ending Assets: $7,200,000 = $3,400,000 + Ending Assets. Ending Assets = $7,200,000 - $3,400,000 = $3,800,000. Distractor A is the calculated average assets. Distractor B is a calculation error. Distractor D results from incorrectly setting average assets equal to ending assets.

Question 14

For the year ended December 31, a company reported earnings before interest and taxes (EBIT) of $500,000. The company has $1,000,000 in interest-bearing debt with an 8% annual interest rate. Its effective tax rate is 25%. At the beginning of the year, total shareholders' equity was $1,800,000, and it was $2,200,000 at year-end. What is the company's return on equity (ROE) for the year?

  1. 15.75% (correct answer)
  2. 16.80%
  3. 18.90%
  4. 21.00%
Explanation: The correct answer is 15.75%. The calculation requires three steps:
  1. Calculate Net Income: Net Income = (EBIT - Interest Expense) × (1 - Tax Rate). Interest Expense = $1,000,000 × 8% = 80,000.NetIncome=(80,000. Net Income = (500,000 - $80,000) × (1 - 0.25) = $420,000 × 0.75 = $315,000.
  2. Calculate Average Shareholders' Equity: Average Equity = (Beginning Equity + Ending Equity) / 2 = ($1,800,000 + $2,200,000) / 2 = $2,000,000.
  3. Calculate ROE: ROE = Net Income / Average Shareholders' Equity = $315,000 / $2,000,000 = 0.1575 or 15.75%.

Question 15

An analyst is calculating return on assets (ROA) for a company with significant debt. To get a measure of profitability that is independent of financing decisions, the analyst adjusts the standard formula. The company has net income of $750,000, interest expense of $200,000, a tax rate of 30%, and average total assets of $10,000,000. What is the company's adjusted ROA?

  1. 7.50%
  2. 8.90% (correct answer)
  3. 9.50%
  4. 10.25%
Explanation: The correct answer is 8.90%. The adjusted ROA formula removes the effect of debt financing from the numerator by adding back the after-tax interest expense to net income. The formula is: Adjusted ROA = [Net Income + Interest Expense × (1 - Tax Rate)] / Average Total Assets.
  1. Calculate after-tax interest expense: $200,000 × (1 - 0.30) = $200,000 × 0.70 = $140,000.
  2. Calculate the adjusted numerator: $750,000 (Net Income) + $140,000 (After-tax interest) = $890,000.
  3. Calculate adjusted ROA: $890,000 / $10,000,000 = 0.089 or 8.90%. Distractor A (7.50%) is the unadjusted ROA ($750,000 / 10,000,000).DistractorC(9.5010,000,000). Distractor C (9.50%) results from adding back the full pre-tax interest expense ((750k + $200k) / $10M). Distractor D is an unrelated calculation error.

Question 16

Quantum Technologies has been experiencing rapid growth over the past three years. The company's return on assets (ROA) increased from 8.2% in 2021 to 11.4% in 2023, while its asset turnover ratio remained relatively stable at approximately 1.8 times. During this same period, the company's debt-to-equity ratio increased from 0.6 to 1.2.

Based on this information and assuming no changes in tax rates, what can be concluded about Quantum Technologies' profitability trends and the likely impact on return on equity (ROE)?

  1. Net profit margin increased by approximately 1.8 percentage points, and ROE likely increased more than proportionally due to stable leverage effects
  2. Net profit margin increased by approximately 1.8 percentage points, and ROE likely increased more than proportionally due to increased financial leverage (correct answer)
  3. Net profit margin increased by approximately 3.2 percentage points, and ROE likely increased less than proportionally due to increased financial risk
  4. Net profit margin increased by approximately 3.2 percentage points, and ROE likely increased more than proportionally due to improved operational efficiency
Explanation: Since ROA = Net Profit Margin × Asset Turnover, and asset turnover remained stable at 1.8: 2021 Net Profit Margin = 8.2% ÷ 1.8 = 4.6%. 2023 Net Profit Margin = 11.4% ÷ 1.8 = 6.3%. The increase is 6.3% - 4.6% = 1.7% (approximately 1.8 percentage points). ROE = ROA × Equity Multiplier. Since debt-to-equity increased from 0.6 to 1.2, the equity multiplier increased from 1.6 to 2.2, amplifying the ROE improvement beyond the ROA improvement. Choice A incorrectly mentions stable leverage. Choices C and D incorrectly calculate the margin increase as 3.2 percentage points.

Question 17

Apex Manufacturing reported net sales of $8,500,000 and cost of goods sold of $5,100,000 for the year ended December 31, 2023. The company's operating expenses totaled $2,380,000, and it paid $85,000 in interest expense. Apex's tax rate is 25%.

What is Apex Manufacturing's net profit margin for 2023, and how does it compare to the gross profit margin?

  1. Net profit margin is 8.2%; it is 31.8 percentage points lower than gross profit margin (correct answer)
  2. Net profit margin is 8.2%; it is 23.8 percentage points lower than gross profit margin
  3. Net profit margin is 10.9%; it is 29.1 percentage points lower than gross profit margin
  4. Net profit margin is 10.9%; it is 24.1 percentage points lower than gross profit margin
Explanation: Gross profit = $8,500,000 - $5,100,000 = $3,400,000. Gross profit margin = $3,400,000 ÷ $8,500,000 = 40.0%. Operating income = $3,400,000 - $2,380,000 = $1,020,000. Income before taxes = $1,020,000 - $85,000 = $935,000. Net income = $935,000 × (1 - 0.25) = $701,250. Net profit margin = $701,250 ÷ $8,500,000 = 8.2%. Difference = 40.0% - 8.2% = 31.8 percentage points. Choice B uses an incorrect calculation of the difference. Choices C and D incorrectly calculate net profit margin by excluding interest or taxes.

Question 18

Meridian Corporation reported the following financial information for 2023: Net income of $840,000, total assets at the beginning of the year of $6,200,000, total assets at the end of the year of $7,400,000, total stockholders' equity at the beginning of the year of $3,800,000, and total stockholders' equity at the end of the year of $4,200,000. The company paid $180,000 in dividends during the year and had no preferred stock outstanding.

If Meridian's return on equity (ROE) for 2023 was 21%, what was the company's return on assets (ROA) for the same period?

  1. 12.4% (correct answer)
  2. 14.7%
  3. 16.8%
  4. 18.3%
Explanation: First, verify the ROE calculation: Average stockholders' equity = ($3,800,000 + $4,200,000) ÷ 2 = $4,000,000. ROE = $840,000 ÷ 4,000,000=214,000,000 = 21% ✓. For ROA: Average total assets = (6,200,000 + $7,400,000) ÷ 2 = $6,800,000. ROA = $840,000 ÷ $6,800,000 = 12.4%. Choice B incorrectly uses ending assets only. Choice C uses beginning assets only. Choice D incorrectly calculates using stockholders' equity in the denominator.

Question 19

Alpha Corporation is analyzing its profitability relative to industry benchmarks. The company's current return on assets (ROA) is 14.2%, which exceeds the industry average of 11.8%. However, the company's return on equity (ROE) of 19.7% is below the industry average of 22.3%. What does this situation suggest about Alpha Corporation's capital structure strategy compared to its industry peers?

  1. Alpha uses significantly more debt financing than industry peers, but its superior operational efficiency is insufficient to overcome the higher interest burden on shareholder returns
  2. Alpha uses significantly less debt financing than industry peers, resulting in lower financial leverage that reduces shareholder returns despite superior asset utilization (correct answer)
  3. Alpha maintains an optimal capital structure similar to industry peers, but faces higher borrowing costs that reduce the effectiveness of financial leverage
  4. Alpha uses moderately more debt financing than industry peers, but lower asset turnover efficiency reduces the overall benefit to shareholder returns
Explanation: Alpha's equity multiplier = ROE ÷ ROA = 19.7% ÷ 14.2% = 1.39. Industry equity multiplier = 22.3% ÷ 11.8% = 1.89. Alpha has a lower equity multiplier (1.39 vs 1.89), indicating less financial leverage (less debt financing) than industry peers. Despite superior ROA (14.2% vs 11.8%), Alpha's ROE is lower due to conservative capital structure. Choice A incorrectly suggests Alpha uses more debt. Choice C incorrectly suggests similar capital structure. Choice D incorrectly suggests more debt and focuses on asset turnover when the issue is leverage.

Question 20

A company reported net sales of $1,200,000 and a net income of $96,000. Its return on assets (ROA) for the same period was 10%. What was the company's total asset turnover ratio?

  1. 0.80
  2. 1.00
  3. 1.25 (correct answer)
  4. 1.50
Explanation: The correct answer is 1.25. This problem requires using two profitability ratios in sequence.
  1. First, use the ROA and Net Income figures to find Average Total Assets. ROA = Net Income / Average Total Assets. So, Average Total Assets = Net Income / ROA = $96,000 / 0.10 = $960,000.
  2. Second, use the Net Sales and the calculated Average Total Assets to find the Total Asset Turnover. Total Asset Turnover = Net Sales / Average Total Assets = $1,200,000 / $960,000 = 1.25. Distractor A (0.80) is the reciprocal of the correct answer, found by incorrectly dividing assets by sales. Distractors B and D represent common calculation errors or guesses.