Chapter 4 Q&A

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San Francisco State University *

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350

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Finance

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Jan 9, 2024

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docx

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1. Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios on which they focus? A: Each group does look at every ratio, however, -Management is interested in all types of ratios because the ratios point out weaknesses that should be strengthened. They also recognize that the other parties are interested in all the ratios and the financial appearance must be kept up if the firm is to be regarded highly by creditors and equity investors -Equity investors (stockholders) are interested primarily in profitability , but they examine the other ratios to obtain information on the riskiness of equity commitments. -Credit analysts are more interested in debt to capital , TIE , and EBITDA coverage ratios, as well as profitability ratios. Short-term creditors emphasize liquidity and a current ratio 2 Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company? A: -The inventory turnover ratio is important for a grocery store because they have a larger inventory needed and some of it is perishable -An insurance company would have no inventory since its line of business is selling insurance or other financial products -Depending on the business different ratios are more important as shown here

3. Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant . What balance sheet accounts must have changed to produce the indicated changes? A: -Sales have not changed and total asset turnover decreased, the company's assets have increased -Fixed asset turnover ratio is constant which means its current assets must be the ones increasing -Current ratio increased, and cash and equivalents and DSO are unchanged which means that the company has increased its inventories 8. Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry? A: -Different accounting techniques may be used making stuff like depreciation different -Investments may be different for example, Pepsi and Coca-Cola while both making soft drinks, and Pepsi also owns other businesses like Quaker Problems 1. DAYS SALES OUTSTANDING Baxley Brothers has a DSO of 23 days, and its annual sales are $3,650,000. What is its accounts receivable balance? Assume that it uses a 365-day year. DSO = 23 Sales = 3,650,000 AR = ? DSO = AR / Avg. Sales Avg. Sales = 3,650,000/365 = 10000 23*10,0000 = AR = 230,000

2. DEBT TO CAPITAL RATIO Kaye’s Kitchenware has a market / book ratio equal to 1. Its stock price is $12 per share and it has 4.8 million shares outstanding. The firm’s total capital is $110 million and it finances with only debt and common equity. What is its debt-to-capital ratio? M/B = 1 MP = 12 Outstanding = 4,800,000 TC = 110,000,000 TIC = TE + TD 110,000,000 = 12*4,800,000 + x TD = X = 52,000,000 52,000,000 / 110,000,000 = 47.64 DC = TD TotalCapital 3. DuPONT ANALYSIS Henderson’s Hardware has an ROA of 11%, a 6% profit margin, and an ROE of 23%. What is its total assets turnover? What is its equity multiplier? ROA = .11 Proft Margin = .06 ROE = 0.23 TAT =? TAT = S/TA EM = ? EM = TA/TE PM = NI/S NI = PM*S ROA = NI/TA ROA = PM*S/TA .11 = .06*S/TA .11/.06 = TAT = 1.83 ROE = PM * TAT *EM .23 = .06 * 1.83 * x X = 2.091

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