Solutions to Chapter 4. Measuring Corporate Performance

Size: px
Start display at page:

Download "Solutions to Chapter 4. Measuring Corporate Performance"

Transcription

1 Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Long-term debt ratio ,018 9,724 b. 4,794 7,018 6,178 Total debt ratio ,714 c. 2,566 Times interest earned d. 2,566 2,518 Cash coverage ratio e. 3,525 Current ratio ,794 f. 89 2,382 Quick ratio ,794 g. 1, Operating profit margin % 13,193 h. 4,060 Inventory turnover ( ) / 2 i. ( ) / 2 Days sales in inventory days 4,060/365 j. (2,382 2,490) / 2 Average collection period days 13,193/ 365 k. 1,223 Return on equity % (9,724 9,121) / 2 4-1

2 1, l. Return on assets % (27,714 27,503) / 2 m. Return on capital 1, % [(7,108 9,724) (6,833 9,121)]/ n. Payout ratio ,223 Est time: Market capitalization = ($84 205,000,000) = $17.22 billion Market value added = $17.22 billion $9.724 billion = $7.496 billion Market-to-book ratio = $17.22 billion/$9.724 billion = 1.77 Est time: All values in millions. EVA = after-tax interest + net income (cost of capital total capitalization) = [$685*(1 0.35)] + $1,223 [8.3% ($7,108 + $9,724)] = $ All values in millions. a. EVA = after-tax interest + net income (cost of capital total capitalization) = [676 (1 0.35)] + $2,661 [.08 (9, ,777)] = $ EVA fell, since the cost of equity is higher. b. Accounting profits are unaffected by changes in the cost of equity. c. Economic value added is a better measure of company performance because accounting profits do not include all costs; specifically, the cost of equity capital. 5. a. MVA = market value of shares book value of equity = $46,192 19,393 = $26,799 MVA fell as the market value of the shares dropped 5% b. No, the expected return on all shares has risen. 4-2

3 c. Yes, the cost of equity capital has increased for Pepsi. 6. a. Sustainable growth rate = plowback ratio ROE = = 0.117, or 11.7% Home Depot s sustainable growth rate will rise with the higher plowback ratio. b. Sustainable growth = = , or 6% The sustainable growth rate will fall. Est time: , Return on assets % (27,714 27,503) / 2 sales 13,193 Asset turnover % average total assets 27,608.5 net income interest 1, Operating profit margin % sales 13,193 Asset turnover operating profit margin = = = ROA 1, Return on equity % (9,724 9,121) / 2 Assets Equity sales assets net income interest sales net income net income interest 27, ,193 1, , % 9, , ,193 1, (Notice that we have used average assets and average equity in this solution.) 4-3

4 9. a. The consulting firm has relatively few assets. The major asset is the knowhow of its employees. The consulting firm has the higher asset turnover ratio. b. The Catalog Shopping Network generates far more sales relative to assets since it does not have to sell goods from stores with high expenses and probably can maintain relatively lower inventories. The Catalog Shopping Network has the higher asset turnover ratio. b. The supermarket has a far higher ratio of sales to assets. The supermarket itself is a simple building and the store sells a high volume of goods with relatively low markups (profit margins). Standard Supermarkets has the higher asset turnover. Est time: ROC = after-tax operating income/equity, or After-tax operating income = ROC equity EVA = after-tax operating income (cost of equity equity), substituting EVA = (ROC equity) (cost of equity equity), or EVA = equity (ROC cost of equity) Thus, EVA is positive if ROC exceeds the cost of equity. 11. a. Debt-equity ratio long-term debt equity b. Return on equity net income average equity c. Operating profit margin net income interest sales cost of goodssold d. Inventory turnover average inventory current assets e. Current ratio current liabilities 4-4

5 average receivables f. Average collection period average daily sales cash marketable securities receivables g. Quick ratio current liabilities 12. If HD borrows $300 million and invests the funds in marketable securities, both current assets and current liabilities will increase. a. Liquidity ratios: 13, Current ratio , , Quick ratio , , Cash ratio , The transaction would result in a slight decrease in the current ratio and an increase in the quick ratio and the cash ratio, so the company might appear to be more liquid. However, a financial analyst would be very unlikely to conclude that the company is actually more liquid after engaging in such a transaction. b. Leverage ratios: The long-term debt ratio and the debt-equity ratio would be unaffected since current liabilities are not included in these ratios. The total debt ratio will increase slightly, however: Total liabilities Total assets 21, , The very slight increase in the total debt ratio indicates that the company would appear to be very slightly more leveraged. However, a financial analyst would conclude that the company is actually no more leveraged than prior to the transaction. 4-5

6 13. a. Current ratio will be unaffected. Inventories are replaced with either cash or accounts receivable, but total current assets are unchanged. b. Current ratio will be unaffected. Accounts due are replaced with the bank loan, but total current liabilities are unchanged. c. Current ratio will be unaffected. Receivables are replaced with cash, but total current assets are unchanged. d. Current ratio will be unaffected. Inventories replace cash, but total current assets are unchanged. 14. The current ratio will be unaffected. Inventories replace cash, but total current assets are unchanged. The quick ratio falls, however, since inventories are not included in the most liquid assets. 15. Average collection period equals average receivables divided by average daily sales: Average collection period 6,333 9,800/ days Days sales in inventories 2 days 73,000/ Annual cost of goods sold = $10, /30 = $121, ,667 Inventory turnover times per year 10,

7 18. a. Interest expense = 0.08 $10 million = $800,000 Times interest earned = $1,000,000/$800,000 = 1.25 b. 1,000, ,000 Cash coverage ratio ,000 c. 1,000, ,000 Fixed payment coverage , , a. ROA = asset turnover operating profit margin = = 0.15 = 15% b. If debt/equity = 1, then debt = equity, so total assets are twice equity. assets 2 20,000 8,000 8,000 ROE ROA debt burden % equity 1 20,000 8, Total sales = $3, /20 = $54,750 Asset turnover ratio = $54,750/$75,000 = 0.73 ROA = asset turnover operating profit margin = = = 3.65% 21. Debt-equity ratio long-term debt equity long-term debt 0.4 long-term debt = 0.4 $1,000,000 = $400,000 $1,000,000 Current assets Current liabilities 2.0 and current assets = $200,000 Therefore, current liabilities = $200,000/2 = $100,000 = notes payable Total liabilities = $500,

8 Total assets = total liabilities + equity = $500,000 + $1,000,000 = $1,500,000 Total debt ratio = $500,000/$1,500,000 = 0.33 Book debt Book equity Market equity 2 Book equity Book debt Market equity EBIT = revenues COGS depreciation = $3,000,000 $2,500,000 $200,000 = $300,000 Interest = 8% of face value = $80,000 Times interest earned = $300,000/$80,000 = 3.75 Est time: The firm has less debt relative to equity than the industry average, but its ratio of EBIT plus depreciation to interest expense is lower. Perhaps the firm has a lower ROA than its competitors and is therefore generating less EBIT per dollar of assets. Perhaps the firm pays a higher interest rate on its debt. Or perhaps its depreciation charges are lower because it uses less capital or older capital. 25. A decline in market interest rates will increase the value of the fixed-rate debt and thus increase the market-value debt-equity ratio. By this measure, leverage will increase. The decline in interest rates will also reduce the firm s interest payments on the floating-rate debt, which will increase the times interest earned ratio. By this measure, leverage will decrease. The impact of the lower rates on leverage is thus ambiguous. The firm has higher indebtedness relative to assets but greater ability to cover its cash-flow obligations. 4-8

9 26. a. The shipping company, which has more tangible assets, will tend to have the higher debt-equity ratio. (See Chapter 15, Sections 15.3 and 15.4, for a discussion of the reasons that firms holding tangible assets with active secondary markets tend to maintain higher debt-equity ratios.) b. United Foods is in a more mature industry and probably has fewer favorable opportunities for reinvesting income. We would expect United Foods to have the higher payout ratio. c. The paper mill will have higher sales per dollar of assets. It is less capital-intensive (that is, has less capital per dollar of sales) than the integrated firm. d. The discount outlet sells many of its goods for cash. The power company bills monthly and usually gives customers a month to pay bills and therefore will have the longer collection period. e. Fledging Electronics will have the higher price-earnings multiple, reflecting its greater growth prospects. 27. Leverage ratios are of interest to banks or other investors lending money to the firm. They want to be assured that the firm is not borrowing more than it can reasonably be expected to repay. Liquidity ratios are also of interest to creditors who prefer that a firm s current assets are well in excess of its current liabilities. Liquidity ratios are especially important to those who lend to the firm for short periods, for example, by extending trade credit. If a firm buys goods on credit, the seller wants to know that, when the bill comes due, the firm will have enough cash on hand to pay it. Efficiency ratios might be of interest to stock market analysts who want to know how well the firm is being run. These ratios are also of great concern to the firm s own management, which needs to know if it is running as tight a ship as its competitors. 4-9

10 28. Income statement: Millions of Dollars Net sales $ Cost of goods sold Selling, general, & administrative expenses Depreciation EBIT Interest expense 1.25 Income before tax 8.75 Tax Net income $ Balance sheet: Millions of Dollars This Year Last Year Assets Cash and marketable securities $ 11 $ 20 Receivables Inventories Total current assets Net property, plant, equipment Total assets $115 $105 Liabilities & Shareholders Equity Accounts payable $ 25 $ 20 Notes payable Total current liabilities Long-term debt Shareholders equity Total liabilities & shareholders equity $115 $105 Solution procedure: 1. Total current liabilities = = Total current assets = = Cash = = Accounts receivable + cash = = Accounts receivable = 55 cash = = Inventories = = Total assets = total liabilities and shareholders equity = Net property, plant, equipment = = Sales = (365/avg. collection period) beginning receivables = (365/73) 34 =

11 10. Cost of goods sold = inventory turnover beginning inventory = = EBIT = = Interest = EBIT/times interest earned = 10/8 = Tax = (EBIT interest) 0.35 = ( ) 0.35 = Net income = EBIT interest tax = = LT debt = LT debt ratio (total assets current liabilities = 0.4 (115 55) = = Shareholders equity = = 36 Est time: a. See table and graph below. Profit Margin (%) Asset Turnover All manufacturing Food products Clothing Beverage & tobacco Chemicals Drugs Machinery Electrical Motor vehicles (0.42) 0.98 Computer and electronic Paper

12 Asset turnover declines as operating profit margin rises. This relationship makes sense as firms with low profit margins need to generate more volume. That is, if margins are low, each dollar of total assets must work harder to produce the same amount of total profit. b. See table and graph below Current Ratio Quick Ratio All Manufacturing Food Products Clothing Beverage & Tobacco Chemicals Drugs Machinery Electrical Motor Vehicles Computer and Electronics Paper

13 Quick Ratio Current Ratio These two measures of liquidity appear to move together. Higher quick ratios are associated with higher current ratios. You may conclude that once you know one of these ratios there is little to be gained by calculating the other. However, analysts should use caution as some firms may have a high current ratios but the result may be due to a high level of illiquid assets, such as old inventory. Est time: If company X does not raise any new finance during the year but generates a lot of earnings during the year that are immediately reinvested, it makes more sense to use starting capital when calculating X s return on capital. Return on capital is understated if average capital is used. The answer would change if X made a large issue of debt early in the year. In this case it would be better to use an average of starting and ending capital. For example, suppose company X has after-tax operating income of $3 million for the year. The starting capital was $30 million, composed of $10 million in longterm debt and $20 million in equity. Using starting capital, the X gives return on capital of 10%. If equity at year-end is $23 million, average capital is $31.5 million and return on capital is understated at only 9.5%. 4-13

14 The answer changes if X made a large issue of debt early in the year because the new debt increases after-tax income from the debt shield. When a company s additional financing during the year contributes a significant part of the year s operating income, it s better to divide by the average of the total capitalization at the beginning and end of the year. Solution to Minicase for Chapter 4 You will find an Excel spreadsheet solution for this minicase at the Online Learning Center (http://www.mhhe.com/bmm7e). Problems for HH are apparent in the areas of debt and assets. Leverage ratios improved between 2003 and 2007, but debt (both long-term and short-term) has increased significantly in Liquidity ratios began to deteriorate in 2007, at the same time that the number of employees increased substantially. Further deterioration in liquidity ratios occurred in 2008, when inventories more than doubled and current liabilities increased by more than 85%. At the same time, sales remained virtually unchanged from

Chapter 17: Financial Statement Analysis

Chapter 17: Financial Statement Analysis FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose

More information

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 3 Interpreting Financial Ratios Concept Check 3.1 1. What are the different motivations that

More information

Financial ratio analysis

Financial ratio analysis Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder

More information

Financial Planning for East Coast Yachts

Financial Planning for East Coast Yachts Financial Planning for East Coast Yachts Prepared for East Coast Yachts Prepared by Dan Ervin, Mary-Ann Lawrence, Kevin Klepacki, Katie Wilson, Andrew Wright January 1, 2010 Table of Contents iii Table

More information

Creating a Successful Financial Plan

Creating a Successful Financial Plan Creating a Successful Financial Plan Basic Financial Reports Balance Sheet - Estimates the firm s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner s Equity Income Statement

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

More information

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio =

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = 1 Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = Cash / CL 98 / 540 =.18 times 2 Computing Leverage

More information

Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

More information

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

More information

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

More information

Fundamental analysis

Fundamental analysis Fundamental analysis 2 June 2016 CERN Finance Club c.laner@cern.ch Introduction Let s cover the two main types of investment analysis used in traditional investing Today: Fundamental analysis Next time:

More information

Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Return on Equity has three ratio components. The three ratios that make up Return on Equity are: Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

More information

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 5. The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate

More information

BACKGROUND KNOWLEDGE for Teachers and Students

BACKGROUND KNOWLEDGE for Teachers and Students Pathway: Business, Marketing, and Computer Education Lesson: BMM C6 4: Financial Statements and Reports Common Core State Standards for Mathematics: N.Q.2 Domain: Quantities Cluster: Reason quantitatively

More information

Chapter 9 Solutions to Problems

Chapter 9 Solutions to Problems Chapter 9 Solutions to Problems 1. a. Cash and cash equivalents are cash in hand and in banks, plus money market securities with maturities of 90 days or less. Accounts receivable are claims on customers

More information

E5-4 Assessing receivable and inventory turnover (AICPA adapted)

E5-4 Assessing receivable and inventory turnover (AICPA adapted) E5-4 Assessing receivable and inventory turnover (AICPA adapted) Accounts receivable turnover Net credit sales = Average trade receivables = $2,500,000 $462,500 = 5.41 times where average trade receivables

More information

6. Financial Planning. Break-even. Operating and Financial Leverage.

6. Financial Planning. Break-even. Operating and Financial Leverage. 6. Financial Planning. Break-even. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future

More information

Financial Ratios and Quality Indicators

Financial Ratios and Quality Indicators Financial Ratios and Quality Indicators From U.S. Small Business Administration Online Women's Business Center If you monitor the ratios on a regular basis you'll gain insight into how effectively you

More information

Performance Review for Electricity Now

Performance Review for Electricity Now Performance Review for Electricity Now For the period ending 03/31/2008 Provided By Mark Dashkewytch 780-963-5783 Report prepared for: Electricity Now Industry: 23821 - Electrical Contractors Revenue:

More information

FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

More information

FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT 100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II djohnston@becpas.com

More information

Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

Total shares at the end of ten years is 100*(1+5%) 10 =162.9. FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a $40 stock that pays a annual cash dividend of $2 a share (a 5% dividend yield) and signs up for the

More information

Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

More information

1) In words, an equity multiplier of 2 means that for every $1:

1) In words, an equity multiplier of 2 means that for every $1: Questions in [New Questions] 1) In words, an equity multiplier of 2 means that for every $1: [A] of debt, a firm has $2 in equity. [B] in equity, a firm has $2 in debt. [C] in assets, a firm has $2 in

More information

2. More important - provide a profile of firm s economic characteristics and competitive strategies.

2. More important - provide a profile of firm s economic characteristics and competitive strategies. RATIO ANALYSIS-OVERVIEW Ratios: 1. Provide a method of standardization 2. More important - provide a profile of firm s economic characteristics and competitive strategies. Although extremely valuable as

More information

Ratio Analysis CBDC, NB. Presented by ACSBE. February, 2008. Copyright 2007 ACSBE. All Rights Reserved.

Ratio Analysis CBDC, NB. Presented by ACSBE. February, 2008. Copyright 2007 ACSBE. All Rights Reserved. Ratio Analysis CBDC, NB February, 2008 Presented by ACSBE Financial Analysis What is Financial Analysis? What Can Financial Ratios Tell? 7 Categories of Financial Ratios Significance of Using Ratios Industry

More information

Please NOTE This example report is for a manufacturing company; however, we can address a similar report for any industry sector.

Please NOTE This example report is for a manufacturing company; however, we can address a similar report for any industry sector. Please NOTE This example report is for a manufacturing company; however, we can address a similar report for any industry sector. Performance Review For the period ended 12/31/2013 Provided By Holbrook

More information

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements In the United States, businesses generally present financial information in the form of financial statements

More information

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION OCTOBER 2006 Table of Contents 1. INTRODUCTION... 3 2. FINANCIAL RATIOS FOR COMPANIES (INDUSTRY - COMMERCE - SERVICES) 4 2.1 Profitability Ratios...4 2.2 Viability

More information

Course 1: Evaluating Financial Performance

Course 1: Evaluating Financial Performance Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating

More information

FI3300 Corporation Finance

FI3300 Corporation Finance Learning Objectives FI3300 Corporation Finance Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance Explain the objectives of financial statement analysis and its benefits for creditors,

More information

Financial Analysis Project. Apple Inc.

Financial Analysis Project. Apple Inc. MBA 606, Managerial Finance Spring 2008 Pfeiffer/Triangle Financial Analysis Project Apple Inc. Prepared by: Radoslav Petrov Course Instructor: Dr. Rosemary E. Minyard Submission Date: 5 May 2008 Petrov,

More information

Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable. Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

More information

Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements. Balance Sheet. Total Liabilities and Shareholder s Equity

Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements. Balance Sheet. Total Liabilities and Shareholder s Equity Chapters 3-4 Financial Statements, Cash Flow, and Analysis of Financial Statements Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Liabilities and Shareholder s Equity

More information

Liquidity analysis: Length of cash cycle

Liquidity analysis: Length of cash cycle 2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition

More information

Chapter 12 Practice Problems

Chapter 12 Practice Problems Chapter 12 Practice Problems 1. Bankers hold more liquid assets than most business firms. Why? The liabilities of business firms (money owed to others) is very rarely callable (meaning that it is required

More information

FNCE 3010 (Durham). HW2 (Financial ratios)

FNCE 3010 (Durham). HW2 (Financial ratios) FNCE 3010 (Durham). HW2 (Financial ratios) 1. What effect would the following actions have on a firms net working capital and current ratio (assume NWC is positive and current ratio is initially greater

More information

Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

More information

Chapter-3 Solutions to Problems

Chapter-3 Solutions to Problems Chapter-3 Solutions to Problems P3-1. P3-2. Reviewing basic financial statements LG 1; Basic Income statement: In this one-year summary of the firm s operations, Technica, Inc. showed a net profit for

More information

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the company s financial situation over

More information

Investment Analysis (FIN 383) Fall Homework 9

Investment Analysis (FIN 383) Fall Homework 9 Investment Analysis (FIN 383) Fall 2009 Homework 9 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit The due date is Tue

More information

Chapter Financial Forecasting

Chapter Financial Forecasting Chapter Financial Forecasting PPT 4-2 Chapter 4 - Outline What is Financial Forecasting? 3 Financial Statements for Forecasting Constructing Pro Forma Statements Basis for Sales Projections Steps in a

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

More information

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL)

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where

More information

performance of a company?

performance of a company? How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

More information

Ratios from the Statement of Financial Position

Ratios from the Statement of Financial Position For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends

More information

Chapter 1 Financial Statement and Cash Flow Analysis

Chapter 1 Financial Statement and Cash Flow Analysis Chapter 1 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

More information

MAN 4720 STRATEGIC MANAGEMENT AND POLICY FORMULATION FINANCIAL ANALYSIS GUIDE

MAN 4720 STRATEGIC MANAGEMENT AND POLICY FORMULATION FINANCIAL ANALYSIS GUIDE MAN 4720 STRATEGIC MANAGEMENT AND POLICY FORMULATION FINANCIAL ANALYSIS GUIDE Revised -December 13, 2011 1 FINANCIAL ANALYSIS USING STRATEGIC PROFIT MODEL RATIOS Introduction Your policy course integrates

More information

Engineering Economics 2013/2014 MISE

Engineering Economics 2013/2014 MISE Problem: JS, Inc. shows the following accounting records for 2011: Sales commissions 15000 Beginning merchandise inventory 16000 Ending merchandise inventory 9000 Sales 185000 Advertising 10000 Purchases

More information

1.1 Role and Responsibilities of Financial Managers

1.1 Role and Responsibilities of Financial Managers 1 Financial Analysis 1.1 Role and Responsibilities of Financial Managers (1) Planning and Forecasting set up financial plans for their organisations in order to shape the company s future position (2)

More information

NWC = current assets - current liabilities = 2,100

NWC = current assets - current liabilities = 2,100 Questions and Problems Chapters 2,3 pp45-47 1. Building a balance sheet. Penguin Pucks, Inc., has current assets of $3,000, net fixed assets $6,000, current liabilities of $900, and long-term debt of $5,000.

More information

CHAPTER 2 INTRODUCTION TO CORPORATE FINANCE

CHAPTER 2 INTRODUCTION TO CORPORATE FINANCE CHAPTER 2 INTRODUCTION TO CORPORATE FINANCE Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and

More information

RATIO ANALYSIS FORMULAS + THEORIES

RATIO ANALYSIS FORMULAS + THEORIES A) Cash Position Ratio : - 1) Absolute Cash Ratio = Cash Reservoir Current Liabilities 2) Cash Position to Total asset Ratio = Cash Reservoir * 100 (Measure liquid layer of assets) Total Assets 3) Interval

More information

Ratios and interpretation

Ratios and interpretation Unit Ratios and interpretation As we learnt in our earlier studies, accounting information is used to answer two key questions about a business: Is it making a profit? Are its assets sufficient to meet

More information

Chapter 2 Financial Statement and Cash Flow Analysis

Chapter 2 Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

More information

Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3

Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3 Key Concepts and Skills Chapter 3 Working With Financial Statements Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know

More information

TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

More information

Reporting and Analyzing Cash Flows QUESTIONS

Reporting and Analyzing Cash Flows QUESTIONS Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users

More information

Is Apple overvalued? An Introduction to Financial Analysis

Is Apple overvalued? An Introduction to Financial Analysis Is overvalued? An Introduction to Financial Analysis The fact that the stock price almost doubled during the last year, was evidence enough for many people to say that investors had gone crazy. Other people

More information

Brief Exercise 14-2 (20 minutes)

Brief Exercise 14-2 (20 minutes) Brief Exercise 14-2 (20 minutes) 1. This Year Last Year Sales... 100.0% 100.0% Cost of goods sold... 62.3 58.6 Gross margin... 37.7 41.4 Operating expenses: Selling expenses... 18.5 18.2 Administrative

More information

Credit Analysis 10-1

Credit Analysis 10-1 Credit Analysis 10-1 10-2 Liquidity and Working Capital Basics Liquidity - Ability to convert assets into cash or to obtain cash to meet short-term obligations. Short-term - Conventionally viewed as a

More information

ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business

More information

9901_1. A. 74.19 days B. 151.21 days C. 138.46 days D. 121.07 days E. 84.76 days

9901_1. A. 74.19 days B. 151.21 days C. 138.46 days D. 121.07 days E. 84.76 days 1. A stakeholder is: 9901_1 Student: A. a creditor to whom a firm currently owes money. B. any person who has voting rights based on stock ownership of a corporation. C. any person or entity other than

More information

CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS

CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS The financial statements discussed in Chapter 4 provide valuable information about a firm s financial and business health. Ratio analysis

More information

FINC 3630: Advanced Business Finance Additional Practice Problems

FINC 3630: Advanced Business Finance Additional Practice Problems FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

More information

Chapter. How Well Am I Doing? Financial Statement Analysis

Chapter. How Well Am I Doing? Financial Statement Analysis Chapter 17 How Well Am I Doing? Financial Statement Analysis 17-2 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the need for and limitations of financial statement

More information

FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS

FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS SYLLABUS Compulsory part Basic ratio analysis 1. State the general functions of accounting ratios. 2. Calculate and interpret the following ratios: a. working capital/current ratio, quick/liquid/acid test

More information

Review for Exam 3. Instructions: Please read carefully

Review for Exam 3. Instructions: Please read carefully Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. You are not responsible for any topics that are not covered in the lecture note

More information

Section 3 Financial and stock market ratios

Section 3 Financial and stock market ratios Section 3 Financial and stock market ratios Introduction 41 Ratio calculation 42 Financial status ratios 43 Stock market ratios 45 Debt: short-term or long-term? 47 Summary 48 Problems 49 INTRODUCTION

More information

Business 2019 Finance I Lakehead University. Midterm Exam

Business 2019 Finance I Lakehead University. Midterm Exam Business 2019 Finance I Lakehead University Midterm Exam Philippe Grégoire Fall 2002 Time allowed: 2 hours. Instructions: Calculators are permitted. One 8.5 11 inches crib sheet is allowed. Verify that

More information

Financial Terms & Calculations

Financial Terms & Calculations Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

More information

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the following 33 questions designed to test your knowledge of the

More information

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and

More information

] (3.3) ] (1 + r)t (3.4)

] (3.3) ] (1 + r)t (3.4) Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of t-year annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity

More information

Company Financial Plan

Company Financial Plan Financial Modeling Templates http://spreadsheetml.com/finance/companyfinancialplan.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse

More information

Chapter 3 Analyzing Financial Statement

Chapter 3 Analyzing Financial Statement Chapter 3 Analyzing Financial Statement Five major areas to analyze. (1) Liquidity Position (2) Management of Assets (3) Management of Debt (4) Company's Profitability (5) Market's View of Company (1)

More information

E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

More information

Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE S FINANCIAL PERFORMANCE

Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE S FINANCIAL PERFORMANCE Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE S FINANCIAL PERFORMANCE December 2013 Acknowledgments This guide and supporting tools were developed by Julie

More information

Using Accounts to Interpret Performance

Using Accounts to Interpret Performance Using s to Interpret Performance ing information is used by stakeholders to judge the performance and efficiency of a business Different stakeholders will look for different things: STAKEHOLDER Shareholders

More information

FUNDAMENTALS OF HEALTHCARE FINANCE. Online Appendix B Financial Analysis Ratios

FUNDAMENTALS OF HEALTHCARE FINANCE. Online Appendix B Financial Analysis Ratios 3/27/09 FUNDAMENTALS OF HEALTHCARE FINANCE Online Appendix B Financial Analysis Ratios Introduction In Chapter 13 of Fundamentals of Healthcare Finance, we indicated that financial ratio analysis is a

More information

Chapter 4. Financial Analysis: Sizing up Firm Performance. Chapter Contents. Learning Objectives

Chapter 4. Financial Analysis: Sizing up Firm Performance. Chapter Contents. Learning Objectives Chapter 4 Financial Analysis: Sizing up Firm Performance Learning Objectives Chapter Contents Principles Used in this Chapter 1.Why Financial Statements are Analyzed 2.Common Size Statements Standardizing

More information

140 SU 3: Profitability Analysis and Analytical Issues

140 SU 3: Profitability Analysis and Analytical Issues 140 SU 3: Profitability Analysis and Analytical Issues QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for

More information

CHAPTER 13. Financial Analysis: The Big Picture

CHAPTER 13. Financial Analysis: The Big Picture CHAPTER 13 Financial Analysis: The Big Picture Discuss the Need for comparative analysis and identify the tools of financial statement analysis Throughout the book we will rely on three types of comparisons

More information

FINANCIAL STATEMENTS AND RATIO ANALYSIS

FINANCIAL STATEMENTS AND RATIO ANALYSIS In following we will be demonstrating the use of ratios to help examine the health of a firm. Ratios allow managers evaluate to a firm's financial statements in order to point out the strengths and weaknesses

More information

Financial Statement and Cash Flow Analysis

Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

This week its Accounting and Beyond

This week its Accounting and Beyond This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools

More information

Chapter 3. Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements

Chapter 3. Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements Chapter 3 Understanding Financial Statements, Taxes, and Cash Flows Agenda Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements 2. The Income Statement

More information

Ratio Analysis: Liquidity, Activity & Coverage

Ratio Analysis: Liquidity, Activity & Coverage Ratio Analysis: Liquidity, Activity & Coverage Quality of Earnings Fraudulent actions Above-average financial risk One-time transactions Borrow from the future/reach into the past Ride the depreciation

More information

Measuring Financial Performance: A Critical Key to Managing Risk

Measuring Financial Performance: A Critical Key to Managing Risk Measuring Financial Performance: A Critical Key to Managing Risk Dr. Laurence M. Crane Director of Education and Training National Crop Insurance Services, Inc. The essence of managing risk is making good

More information

Tejas Steel Supply, Inc.

Tejas Steel Supply, Inc. Tejas Steel Supply, Inc. James B. Bexley Sam Houston State University Joe F. James Sam Houston State University Abstract This case study is designed to explore the credit needs and worthiness of Tejas

More information

Solutions to Chapter 3. Accounting and Finance

Solutions to Chapter 3. Accounting and Finance Solutions to Chapter 3 Accounting and Finance 1. Sophie s Sofas Liabilities & Assets Shareholders Equity Cash $ 10,000 Accounts payable $ 17,000 Accounts receivable 22,000 Long-term debt 170,000 Inventory

More information

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability TO THE NET 1. a. 1. Quaker develops, produces, and markets a broad range of formulated chemical specialty products for various heavy

More information

Evaluate Performance: Balance Sheet

Evaluate Performance: Balance Sheet Excerpted from FastTrac GrowthVenture Financial statements and reports must be read together to learn the whole financial story. For example, an Income Statement may report a large sale to a new customer,

More information

2. More important - provide a profile of firm s economic characteristics and competitive strategies.

2. More important - provide a profile of firm s economic characteristics and competitive strategies. RATIO ANALYSIS-OVERVIEW Ratios: 1. Provide a method of standardization 2. More important - provide a profile of firm s economic characteristics and competitive strategies. C Company Sales $ 100,000 $ 125,000

More information

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest

More information

Integrated Case. 4-25 D Leon Inc., Part II Financial Statement Analysis

Integrated Case. 4-25 D Leon Inc., Part II Financial Statement Analysis Integrated Case 4-25 D Leon Inc., Part II Financial Statement Analysis Part I of this case, presented in Chapter 3, discussed the situation of D Leon Inc., a regional snack foods producer, after an expansion

More information

Performance Review. Sample Company

Performance Review. Sample Company Performance Review Sample Company For the period ended 12/31/2017 Provided By Page 1 / 18 This report is designed to assist you in your business' development. Below you will find your overall ranking,

More information