Financial Ratio Analysis and Economic Value Added - Download as Excel by dxt20800

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									                           0911afce-3e66-4322-993b-c1be22caa5fd.xls




                        CHAPTER 4 PROBLEMS
             EVALUATING A FIRM'S FINANCIAL PERFORMANCE

PROBLEM 4-1
RATIO ANALYSIS

DATA
Target current ratio:                                                  2
Current assets                                                 2,145,000
Current Liabilities                                              858,000

Additional Inventories =

PROBLEM 4-2
RATIO ANALYSIS

DATA
Sales                                                         65,000,000
Total Assets                                                  42,000,000
Total Liabilites                                              20,000,000
Interest rate                                                       6.0%
Tax rate                                                           30.0%
Operating margin                                                   12.0%

Operating income
  Less interest expense
Income before taxes
  Less taxes
Net income

OROA
ROE

PROBLEM 4-3
RATIO ANALYSIS

DATA
Sales                                                            400,000
Cost of goods sold                                               112,000
Operating expenses                                               130,000



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Increase in retained earnings                                          58,000
Common stock outstanding                                               22,000 shares
Dividend per share                                                         1.6
Tax rate                                                                 0.34

A.
Income Statement:
Net sales
COGS
  Gross profit
Operating expenses
Operating income
Interest expense
Income before taxes
Tax
  Net income

B.
Operating profit margin

C.
Times interest earned




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PROBLEM 4-4
RATIO ANALYSIS

Stockholders' equity                                             750,500
Earnings per share                                                     3
Price/Earnings ratio                                               12.25
Common stock outstanding                                          50,000 shares

Price/book

PROBLEM 4-5
RATIO ANALYSIS

DATA
Target current ratio:                                                 2.0
Current ratio:                                                        2.5
Current assets:                                                2,500,000
Current liabilities:

Additional funding =

PROBLEM 4-6
RATIO ANALYSIS

DATA
Balance Sheet:
Cash                                                                   $500
Acct/Rec                                                              2,000
Inventories                                                           1,000
  Current assets                                                      3,500
Net fixed assets                                                      4,500
  Total assets                                                        8,000

Accts/Pay                                                             1,100
Accrued expenses                                                        600
Short-term N/P                                                          300
 Current liabilities                                                  2,000
Long-term debt                                                        2,000




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Owner's equity                                                            4,000
 Total liabilities and owers equity                                      $8,000

Income Statement:
Net sales                                                                $8,000
COGS                                                                      3,300
  Gross profit                                                            4,700
Operating expenses                                                        3,000
  Net operating income                                                    1,700
Interest expense                                                            367
  EBT                                                                     1,333
Income taxes                                                                533
  Net income                                                               $800

Calculate the following ratios:
 Current ratio =
 Debt ratio =
 Times interest earned =
 Average collection period =
 Inventory turnover =
 Fixed asset turnover =
 Total asset turnover =
 Gross profit margin =
 Operating profit margin =
 Operating return on assets =
 Return on equity =

PROBLEM 4-7
ANALYZING OPERATING RETURN ON ASSETS

DATA
Operating profit margin:                                                  10.0%
Sales:                                                               10,000,000
Total assets:                                                         5,000,000

A)
Total asset turnover ratio:

B)
Goal of total asset turnover:
Amount of sales increase
Growth rate on Sales =


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C)
OROA for last yr:
OROA for next yr:

PROBLEM 4-8
USING FINANCIAL RATIOS

DATA
Gross profit margin:                                                30.0%
Sales:                                                          9,000,000
Sales on credit:                                                    75.0%
Current assets:                                                 1,500,000
Current liabilities:                                              300,000
Cash and marketable sec:                                          100,000

A)
Accts/Rec

Average collection pd =

B)
Average collection pd =

New Acct/Rec =
Reduce =

C)
Inventory turnover ratio:

Level of inventories =

PROBLEM 4-9
RATIO ANALYSIS

DATA
Balance Sheet                                    2007            2008
Assets:
Cash                                                  $200              $150
Accts/Rec                                              450               425
Inventory                                              550               625
  Current assets                                     1,200             1,200


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Plant and equip.                                          2,200         2,600
  Less: Acc dep                                           1,000         1,200
  Net plant and equip.                                    1,200         1,400
  Total assets                                           $2,400        $2,600


Liabilities and Owners' Equity:                      2007            2008
Accts/Pay                                                $200            $150
Notes Pay-Current                                           0             150
  Current liabilities                                     200             300
Bonds                                                     600             600
Owners' equity
  Common stock                                              300              300
  Paid-in Capital                                           600              600
  Retained earnings                                         700              800
  Total owners' equity                                    1,600            1,700
Total liabilities and owners' equity
 owners' equity                                          $2,400        $2,600

Income Statement:                                    2007            2008
Sales                                                  $1,200          $1,450
COGS                                                      700             850
  Gross profit                                            500             600
Operating expenses                                         30              40
Depreciation                                              220             200
Net operating income                                      250             360
Interest expense                                           50              64
Net income before tax                                     200             296
Taxes (40%)                                                80             118
Net income                                               $120            $178

A)                                                                                 Industry
                                                     2007            2008           Norm
Current ratio =                                                                          5.00
Acid test ratio =                                                                        3.00
Inventory turnover =                                                                     2.20
Average collection pd =                                                                 90.00
Debt ratio =                                                                             0.33
Times int earned =                                                                       7.00
Total asset turnover =                                                                   0.75
Fixed asset turnover =                                                                   1.00
Oper profit margin =                                                                     0.20


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Return on common equity =                                                      0.09
Operating return on assets =                                                   0.15

PROBLEM 4-10
FINANCIAL RATIOS-INVESTMENT ANALYSIS

DATA
Current Assets                                                      $500,000
Net Fixed Assets                                                   1,500,000
Total Assets                                                       2,000,000

Liabilities                                                        1,000,000
Owners' Equity                                                     1,000,000
Total Liabilities and Owners' Equity                              $2,000,000

Income Statement
Sales                                                             $4,500,000
  Less: COGS                                                       3,500,000
Gross Profit                                                       1,000,000
  Less: Oper Exp                                                     500,000
Net Oper Income                                                      500,000
  Less: Interest Exp                                                 100,000
EBT                                                                  400,000
  Less: Taxes                                                        200,000
Net Income                                                          $200,000

A)
Total asset turnover =
Operating profit margin =
Operating return on assets =

B)
Added plant & equip
Present debt ratio
New Oper profit margin

New Operating return on assets =

C)
Interest expense rises by:

                                                    Post:           Pre:


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NOI
 Less: Interest
EBT
 Less: Taxes (50%)
Net Inc Available to Common

Post Renovation Analysis:
Return on Common Equity =

Pre-renovation Analysis:
Return on Common Equity =

PROBLEM 4-11
FINANCIAL ANALYSIS

DATA
Balance Sheets                                      2007            2008
Assets
Cash                                                 $15,000         $14,000
Mrktable securities                                    6,000           6,200
Accts receivable                                      42,000          33,000
Inventory                                             51,000          84,000
Prepaid rent                                           1,200           1,100
  Total current assets                               115,200         138,300
Net plant and equip                                  286,000         270,000
  Total assets                                      $401,200        $408,300

Liabibliities and Stockholders' Equity:             2007            2008
Accts payable                                        $48,000         $57,000
Notes payable                                         15,000          13,000
Accruals                                               6,000           5,000
  Total current liabilities                           69,000          75,000
Long-term debt                                       160,000         150,000
Common Stockholders' equity                          172,200         183,300
  Total liabilities and equity                      $401,200        $408,300

Income Statement
Sales                                                               $600,000
Less: COGS                                                           460,000
Gross profit                                                         140,000
Less: Expenses
  General and Adm.                                      30,000


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  Interest                                                 10,000
  Depreciation                                             30,000
  Total                                                               70,000
Profit before taxes                                                   70,000
Less: Taxes                                                           27,100
Profits after taxes                                                   42,900
Less: Cash dividends                                                  31,800
To R/E                                                               $11,100

A)
Ratio                                                Jarmon         Norm
Current ratio                                                           1.80
Acid test ratio                                                         0.90
Debt ratio                                                              0.50
Times interest earned                                                  10.00
Average collection period                                              20.00
Inventory turnover                                                      7.00
Return on common equity                                                 0.12
Gross profit margin                                                     0.25
Operating ROI                                                           0.17
Operating profit margin                                                 0.14
Total asset turnover                                                    1.20
Fixed asset turnover                                                    1.80

C)
Free Cash Flows :
step 1: after-tax cash flows from operations
Operating Income (EBIT)
Depreciation expense
Tax expense
After-tax cash flows from operations

Step 2: change in net operating working capital
  Change in current assets
  Change in accounts payable
  Change in accruals
Change in net operating working capital

Step 3: Change in long-term assets
Net cash used for investments

Free Cash Flows


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4-12
ECONOMIC VALUE ADDED

DATA
OIROI                                                                     0.12
Opportunity cost of funds                                                 0.14
Total assets                                                               100 million

Economic Value Added                                                            million

MINI CASE

DATA
                                                       GM          Toyota
                                                       2005        2005
Sales                                                  $190,215    $172,749
  Cost of goods sold                                    155,264     129,100
Gross profit                                             34,951      43,649
  Selling, general, and administrative expenses          22,734      18,095
  Depreciation and amortization                          15,769        9,291
Operating profit                                         (3,552)     16,263
  Interest expense                                       15,768          177
  Non-operating income/expense                            2,984        2,244
  Extraordinary items                                      (109)      (1,297)
Pretax income                                           (16,445)     17,033
  Provision for income taxes                             (5,878)       6,126
Net income                                             ($10,567)    $10,907

Annual Balance Sheet ($ millions)                      GM          Toyota
At 12/31/2003                                         2005         2005
Assets
Cash & equivalents                                      $32,142      $19,466
Accounts receivables                                    199,407       47,166
Inventories                                              36,219       12,168
Other current assets                                      8,877        9,105
  Total current assets                                  276,645       87,905

Gross plant, property & equipment                       130,226      130,916
Accumulated depreciation                                 51,825       76,948
Net plant, property & equipment                          78,401       53,968
Investments                                              23,891       77,296


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Intangibles                                             9,097               0
Other assets                                           88,044           7,435
  Total assets                                       $476,078        $226,604

Liabilities:
Accounts payable                                       29,913          17,290
Notes payable                                               0          22,179
Accrued expenses                                       65,614          12,006
Short-term notes                                       83,747          13,444
Other current liabilities                               3,759          11,692
  Total current liabilities                           183,033          76,611

Long term notes                                       203,598          46,698
Other long-term liabilities                            74,850          19,070
 Total Liabilities                                    461,481         142,379
Common stock                                              943           3,697
Paid-in capital                                        15,285           4,616
Retained earnings                                      (1,631)         75,912
 Common equity                                         14,597          84,225
 Total liabilities and equity                        $476,078        $226,604

Solution
                                                                                Industry
A)                                                    GM            Toyota       Norms
Current ratio                                                                         1.20
Acid-test ratio                                                                       0.70
Average collection period                                                            27.90
Accounts receivable turnover                                                         13.10
Inventory turnover                                                                   15.00
Operating income return on investment                                                 0.13
Gross profit margin                                                                   0.30
Operating profit margin                                                               0.06
Total asset turnover                                                                  2.10
Fixed asset turnover                                                                  6.60
Debt ratio                                                                            0.71
Times interest earned                                                                 2.80
Return on equity (before taxes)                                                       0.19
Return on equity (before extra. items and taxes)

B)                                                   GM             Toyota
                                                     FYE             FYE
                                                   12/31/05         3/31/05


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Stock Price
Number of shares
book value

earnings ratio
Price/earnings ratio =
book value ratio
Market/book ratio =

C)
OIROI
Cost of Capital
Total Assets

EVA =




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