Finance

Satisfactory Essays
FINANCIAL STATEMENT ANALYSIS

Problem 13-1

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

( Figures are in Million)

M N

Sales $ 1080 $ 1215

Net Income 54 122

Investment 180 405

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

[pic]

[pic]

N has the higher profit margin.

b. Investment Turnover

[pic]

[pic]

M has the higher investment turnover.

c. Return on Investment

[pic]

[pic]

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 31 525000

Long term debt Jan 1 75000

Long term debt Dec 31 96000

Owners Equity Jan 1 278000

Owners Equity Dec 31 303000

Net income for the year 54000

Interest expense on long term debt 4200

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

[pic]

[pic]

= .123

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