# Finance

Topics: Inventory, Investment, Revenue Pages: 9 (813 words) Published: December 10, 2012
FINANCIAL STATEMENT ANALYSIS

Problem 13-1

You are given the following data on two companies M and N

( Figures are in Million)

MN

Sales \$ 1080\$ 1215

Net Income54122

Investment180405

Required:

A. Which company has the higher profit margin?

B. Which company has the higher investment turnover ?

C. Based on the data given, in which firm would you prefer to invest ?

SOLUTION:

a. Profit Margins

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N has the higher profit margin.

b. Investment Turnover

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M has the higher investment turnover.

c. Return on Investment

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Both firms have similar returns on investments. Based on this investment criterion, the investments are equally attractive.

Problem 13-2

As the manager of LOSEN Division of Mc Carthy Corporation you are interested in determining the division’s return on Investment. As division manager you have no control over financing assets but you control acquisitions and disposition of assets. The division controller has given you the following data to aid you in calculating return on investment:

Fiscal year , Jan 1 to December 31 ( 000 omitted ):

Total assets Jan 1\$ 400000

Total assets Dec 31525000

Long term debt Jan 175000

Long term debt Dec 3196000

Owners Equity Jan 1278000

Owners Equity Dec 31303000

Net income for the year54000

Interest expense on long term debt4200

Tax rate = 30%

Required:

What method would be most appropriate for calculating the division return on investment (ROI) ? Why ?

Using this method what is ROI for the current year ?

SOLUTION:

Since the division has no control over the financing of its assets employed in its operation, the most appropriate measure of return on investment to use to judge its performance is

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= .123 (12.3 percent).

Problem 13-3

The president of Kelly Company is interested in determining how effective the company’s new controller has been in controlling cash on hand. You have the following information available from the fiscal year preceding the new controllers arrival and the current year :

Current year Preceding year

Cash on hand \$ 5479296\$6123704

Cash expenses\$8313840899748943

Required :

Does it appear that the new controller has been effective in managing cash ?

Current Year

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= 24 days

Preceeding Year

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= 22.4 days

The new controller holds more cash relative to the company’s cash expenses than did the old controller. The higher level may be safer (i.e. less chance of not meeting payments when due), but what is its cost? If the cash balance is excessive, the excess is a low-return use of cash compared to investing it in higher return assets.

Problem 13-4

The treasurer of GOLD stores Inc was interested in what effect if any new credit terms have had on collections of customer accounts. The usual 30 day payment period was shortened to 20 days in an attempt to reduce the investment in accounts receivable. The following information for the current year and the preceding year ( prior to the payment period change ) is available :

Current year Preceding year

Account receivable

( net of bad debt allowance)\$1392790\$1207393

Credit sales 1303508511597327

What effect has the new credit policy apparently had ?

SOLUTION :

Current Year

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= 39 days

Previous Year

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= 38 days

The new policy has not changed the payment practices of customers in any...