CQ 4, 7
Problems 1-8, 12, 17, 18
February 8, 2012
4. Financial Ratios Fully explain the kind of information the following financial ratios provide about a firm:
| This ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, which is why inventory is omitted.
| Cash Ratio
| This assesses a company’s financial durability by examining whether it is at least profitable enough to pay off its interest expenses.
| Total Asset Turnover
| Tells us the amount of sales generated for every dollar worth of assets.
| Equity Multiplier
| Tells us how a company uses debt to finance its assets.
| Long-term Debt Ratio
| Measures the percentage of the overall company’s assets that are owned by the equity and debt.
| Times Interest Earned Ratio
| (TIE) Tells us about a company’s ability to meet it’s debt obligations. This could force a company into bankruptcy.
| Profit Margin
| Measures how much out of every dollar of sales a company actually keeps in earnings.
| Return on Assets
| Displayed as a percentage. An indicator of how profitable a company is relative to its total assets.
| Return on Equity
| Displayed as a percentage. Measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested.
| Price-Earnings Ratio
| A valuation ratio of a company’s current share price compared to its per-share earnings. A high P/E suggests investors are expecting higher earning growth in the future.
7. Du Pont Identity Why is the Du Pont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.
The Du Pont identity is a valuable tool for analyzing the performance of a firm because it breaks return on equity (ROE) into three parts: operating efficiency, asset use efficiency, and financial leverage. If ROE is unsatisfactory, the Du Pont identity helps locate the part of the business that is underperforming.
Current Ratio = Current Assets/Current Liabilities= $5,090/$3,720 = 1.37 times
NWC = CA – CL
NWC = 1370
CL = 3720
1370 = CA – 3720
5090 = CA
Quick Ratio = (CA – Inventory)/CL = ($5,090 – $1,950)/$3,720 = 0.84 times
Profit Margin = Net Income/Sales
ROA = Net Income/Total Assets
8% = ??? .
Net Income = $2,320,000
ROA = 13%
ROE = Net Income/Total Equity
ROE = 21%
Receivables Turnover = Sales/Accounts Receivable
9.14 times = $3,943,709/$431,287
Days in Receivables = 365/RT
= 365 Days/9.14 = 36.25 Days
Inventory Turnover = COGS/Inventory = 4,105,612/407,534 = 10.07 times Days in Inventory = 365/Inventory TO= 365 Days/10.07
= 36.25 Days
Total Debt Ratio = 0.63 times
($1-$0.63 = $0.37) $0.37 In debt for every $1 in assets. Debt-Equity Ratio = 0.63/$0.37
= 1.70 times
Equity Multiplier = $1 + $1.70 = $2.70
= $1/$0.37 = $2.70
EPS = Net Income/ Total Shares Outstanding
Add to R/E = Net Income – Dividends = $605,000/210,000
430,000 = Net Income – 175,000 = $2.88
605,000 = Net Income
Total Dividends/Total Shares Outstanding.
BVPS = TE/Total Shares Outstanding
Market to Book = Market Value per Share/Book Value per share
= 2.50 times
P/E = Price per Share/EPS
= 21.88 times
Price to Sales = Price per Share/Sales per Share
= 2.94 times
ROE = Profit Margin * TA...
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