Solutions to Chapter 4. Measuring Corporate Performance


 Sydney King
 5 years ago
 Views:
Transcription
1 Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Longterm 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 41
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 Markettobook ratio = $17.22 billion/$9.724 billion = 1.77 Est time: All values in millions. EVA = aftertax 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 = aftertax 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. 42
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.) 43
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 = aftertax operating income/equity, or Aftertax operating income = ROC equity EVA = aftertax 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. Debtequity ratio longterm 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 44
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 longterm debt ratio and the debtequity 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. 45
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. Debtequity ratio longterm debt equity longterm debt 0.4 longterm 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 fixedrate debt and thus increase the marketvalue debtequity ratio. By this measure, leverage will increase. The decline in interest rates will also reduce the firm s interest payments on the floatingrate 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 cashflow obligations. 48
9 26. a. The shipping company, which has more tangible assets, will tend to have the higher debtequity 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 debtequity 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 capitalintensive (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 priceearnings 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. 49
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 Longterm 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 aftertax 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 yearend is $23 million, average capital is $31.5 million and return on capital is understated at only 9.5%. 413
14 The answer changes if X made a large issue of debt early in the year because the new debt increases aftertax 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 ( Problems for HH are apparent in the areas of debt and assets. Leverage ratios improved between 2003 and 2007, but debt (both longterm and shortterm) 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
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 informationUnderstanding 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 informationFinancial 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 informationFinancial Planning for East Coast Yachts
Financial Planning for East Coast Yachts Prepared for East Coast Yachts Prepared by Dan Ervin, MaryAnn Lawrence, Kevin Klepacki, Katie Wilson, Andrew Wright January 1, 2010 Table of Contents iii Table
More informationHow To Calculate Financial Leverage Ratio
What Do ShortTerm 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 informationCHAPTER 3 LONGTERM FINANCIAL PLANNING AND GROWTH
CHAPTER 3 LONGTERM 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 informationFinancial 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 informationComputing 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 informationRatio 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 informationCreating 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 informationFinancial 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 informationPerformance Review for Electricity Now
Performance Review for Electricity Now For the period ending 03/31/2008 Provided By Mark Dashkewytch 7809635783 Report prepared for: Electricity Now Industry: 23821  Electrical Contractors Revenue:
More informationFSA 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 informationFinancial 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 informationE54 Assessing receivable and inventory turnover (AICPA adapted)
E54 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 informationIncome 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 informationChapter 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 informationFNCE 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 informationTotal 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 information2. More important  provide a profile of firm s economic characteristics and competitive strategies.
RATIO ANALYSISOVERVIEW 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 informationFINANCIAL MANAGEMENT
100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 5403819333 FAX: 5403818319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II djohnston@becpas.com
More informationReview 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 informationCHAPTER 3 LONGTERM FINANCIAL PLANNING AND GROWTH
CHAPTER 3 LONGTERM 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 informationCHAPTER 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 informationChapters 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 informationReturn 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 informationPlease 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 informationLiquidity 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 informationRatio 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 informationFI3300 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 informationFINC 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 yearended February 1, 2015 (the 2014 fiscal
More informationCHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW
CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All endofchapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and
More informationUnderstanding 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 information6. Financial Planning. Breakeven. Operating and Financial Leverage.
6. Financial Planning. Breakeven. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future
More informationFinancial 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 informationChapter Financial Forecasting
Chapter Financial Forecasting PPT 42 Chapter 4  Outline What is Financial Forecasting? 3 Financial Statements for Forecasting Constructing Pro Forma Statements Basis for Sales Projections Steps in a
More informationCHAPTER 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 informationNWC = current assets  current liabilities = 2,100
Questions and Problems Chapters 2,3 pp4547 1. Building a balance sheet. Penguin Pucks, Inc., has current assets of $3,000, net fixed assets $6,000, current liabilities of $900, and longterm debt of $5,000.
More informationMAN 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 informationBusiness 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 informationBACKGROUND 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 informationTYPES 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 informationChapter 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. Longterm debt c. Sales d. Inventory
More informationOften 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 informationChapter 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. Longterm debt c. Sales d. Inventory
More informationChapter. How Well Am I Doing? Financial Statement Analysis
Chapter 17 How Well Am I Doing? Financial Statement Analysis 172 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the need for and limitations of financial statement
More informationChapter3 Solutions to Problems
Chapter3 Solutions to Problems P31. P32. Reviewing basic financial statements LG 1; Basic Income statement: In this oneyear summary of the firm s operations, Technica, Inc. showed a net profit for
More informationReporting 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 information1.1 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 informationSection 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: shortterm or longterm? 47 Summary 48 Problems 49 INTRODUCTION
More informationperformance 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 informationICAP 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 informationCourse 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 informationKey Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 11. 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 informationIs 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 informationCredit Analysis 101
Credit Analysis 101 102 Liquidity and Working Capital Basics Liquidity  Ability to convert assets into cash or to obtain cash to meet shortterm obligations. Shortterm  Conventionally viewed as a
More informationFUNDAMENTALS 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] (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 tyear annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity
More informationUnderstanding 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 informationFinancial 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 informationRatios 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 informationChapter 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 informationReview 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. Questions in the multiple choice section will be either concept or calculation
More information9901_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 informationACC 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 informationCHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOW
CHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. Liquidity measures how quickly and easily an asset can be converted to cash without significant
More informationSmithfield Motors: A case in lending, strategy, and value
ABSTRACT Smithfield Motors: A case in lending, strategy, and value Steve A. Nenninger Sam Houston State University The primary subject matter of this case is financial statement analysis. Issues examined
More informationTejas 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 information140 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 informationFinancial 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 informationIntegrated Case. 425 D Leon Inc., Part II Financial Statement Analysis
Integrated Case 425 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 informationUnderstanding 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 attorneyclient relationship,
More informationFinancial Statement Ratio Analysis
Management Accounting 319 Financial Statement Ratio Analysis Financial statements as prepared by the accountant are documents containing much valuable information. Some of the information requires little
More informationFINANCIAL 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 informationEngineering 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 informationPerformance 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 informationESSENTIALS 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 informationCompany Financial Plan
Financial Modeling Templates http://spreadsheetml.com/finance/companyfinancialplan.shtml Copyright (c) 20092014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse
More information2. More important  provide a profile of firm s economic characteristics and competitive strategies.
RATIO ANALYSISOVERVIEW 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 informationE22: Identifying Financing, Investing and Operating Transactions?
E22: 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 informationFundamental Analysis Ratios
Fundamental Analysis Ratios Fundamental analysis ratios are used to both measure the performance of a company relative to other companies in the same market sector and to value a company. There are three
More informationABOUT FINANCIAL RATIO ANALYSIS
ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2008 Answers 1 (a) Rights issue price = 2 5 x 0 8 = $2 00 per share Theoretical ex rights price = ((2 50 x 4) + (1 x 2 00)/5=$2
More informationRatios 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 informationa. venture financing typically goes to established large companies with impressive histories
Review of Lecture 6 Quiz and Test Questions 1. BS17 Which statement about a venture capitalist is most accurate? a. venture financing typically goes to established large companies with impressive histories
More informationFINANCIAL 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 informationHEALTHCARE FINANCE: AN INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT. Online Appendix A Financial Ratios
HEALTHCARE FINANCE: AN INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT Online Appendix A Financial Ratios INTRODUCTION In Chapter 17, we indicated that ratio analysis is a technique commonly used to
More informationEquity Valuation. Lecture Notes # 8. 3 Choice of the Appropriate Discount Rate 2. 4 Future Cash Flows: the Dividend Discount Model (DDM) 3
Equity Valuation Lecture Notes # 8 Contents About Valuation 2 2 PresentValues 2 3 Choice of the Appropriate Discount Rate 2 4 Future Cash Flows: the Dividend Discount Model (DDM) 3 5 The TwoStage DividendGrowth
More informationFinancial 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 informationGuide to Financial Statements Study Guide
Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation
More informationFinancial 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 informationFinance Master. Winter 2015/16. Jprof. Narly Dwarkasing University of Bonn, IFS
Finance Master Winter 2015/16 Jprof. Narly Dwarkasing University of Bonn, IFS Chapter 2 Outline 2.1 Firms Disclosure of Financial Information 2.2 The Balance Sheet 2.3 The Income Statement 2.4 The Statement
More informationCHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW
CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring
More informationRatio Analysis: Liquidity, Activity & Coverage
Ratio Analysis: Liquidity, Activity & Coverage Quality of Earnings Fraudulent actions Aboveaverage financial risk Onetime transactions Borrow from the future/reach into the past Ride the depreciation
More informationEvaluate 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 informationRatio Analysis 0.75. Fixed Assets Fixed Assets + Net Working Capital =0.75 Fixed Assets
Ratio Analysis CA Past Years Exam Answer Answer to Q.1: (Nov, 009) Fixed assets ` 18,00,000 Proprietor s funds ` 4,00,000 Note: 1 Ratio of fixed assets to proprietor s funds 0.75 Properietors Fund 0.75
More informationUsing 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 informationMeasuring Corporate Performance
C HAPTER 4 Measuring Corporate Performance LEARNING OBJECTIVES After studying this chapter, you should be able to: 1 2 Calculate and interpret the market value and market value added of a public corporation.
More information