1.Firm selection
This essay selects REA Group LTD as the growth stock and Boral LTD as a mature firm with substantial tangible assets.
The reasons why I determine REA Group LTD as a growth stock in based on three aspects.
First is about cash flow growth. The EBITs for REA from 2011 to 2015 are 103.2m, 126m, 163.7m, 225.1m, 285.8m, respectively. From 2014 to 2015, the EBIT has a growth of 27 percent. The revenue in 2014 is 437.5 million, and it became 522.9 million in 2015, with a 20 percent growth.
Second is about operation ability. Average monthly visits to its website reaestate.com.au has grown by 26 percent in 2015, in another word, it is a growth of 24.3 million visits every month. Furthermore, consumers always spend more time on
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From the data above, the tangible asset accounts for 51.29 percent of the total asset. On the other hand, Boral’s total asset is 5587 million in 2006, only a 5 percent growth in the past decade. As a consequence, Boral is a firm with substantial tangible asset.
2. The leverage ratio calculation
The formula to calculate leverage ratio is shown below:
For REA, total liabilities are 91,120,000. Total assets equal to 652,477,000. Using the formula above, we can get debt ratio equals to 13.97 percent. This is the debt ratio for REA in book value aspect.
The number of shares for REA is 131,714,699. And the price of the stock at 30 June 2015 is 39.21. So the market value of equity is 5,164,533,348. The total liabilities are assumed same as it in book value aspect. So the debt ratio is 1.76 percent.
For Boral LTD, under the book value condition, the total asset is 5865.4 million. The liabilities are 2341.3 million. The total equity is 3524.1 million. Using the formula above, the D/E ratio equals to 39.91 percent.
The number of shares for Boral is 768,163,400. The price is 5.85 on 30 June 2015. So the market value of equity is 4,493,755,890. The liabilities are assumed the same as in book value aspect. The debt ratio equals to 34.25 percent.
3. Leverage ratio in two firms
The difference between book value and market value’s leverage ratio
Company does not have big amount of debt to pay. In 1994 its outstanding debt is only 36.4% of its total assets which is a healthy rate. Its current assets are higher 2.4 times than its current liability. Also company has no outstanding interest to pay. Price earning ratio of 42.80 is highest among the competitors. (Pls. see exhibit 2, 3&4) for details. So we can safely conclude that BBBY has great potential to sustain.
Interpretation: 53% of the total assets are financed through debts; the remaining 39% is financed through equity.
Debt to Equity Ratio of 1.23 more than 1 reveals that more than half of assets are financed by debt.
Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.
Market value per share = Book value per share = $12,000 / 750 shares = $16 per share
24) A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock, what would its new debt-to-equity ratio be?
When combining the figures for ROE, ROA and the DuPont analysis it appears that the company is using leverage favourably. ROE is greater than ROA and assets are greater than equity. This is a positive sign for shareholders as it suggests a good investment return in a company that is managing its shareholder equity well (Evans & McDowell, 2009).
We calculated the proportions of debt and equity for the project based on the market value of the debt and equity held by Southwest Airlines in spring 2002. Total
Return on Total Assets was 4.43% which is below five percent. That indicates that the company is not accurately converting its assets into profit. The total for Return on Stockholders’ Equity was 8.89%, however financial analysts prefer ROE to range between 15-20 %. The company’s low ROE indicates that the company is not generating profit with new investments. Lastly, Debt-to-Equity ratio for the company was 1.01 which indicates that investors and creditors are equally sharing assets. In the view of creditors, they see a high ratio as a risk factor because it can indicate that investors are not investing due to the company’s overall performance. The totals of these three ratios demonstrate that the company’s financial state is not as healthy as it should be.
Return on net assets = Net Income in Statement of Operations / Net Assets in the Balance Sheet
Debt-to Asset Ratio indicates that 48% of AMT's assets money comes from creditors (1985). In addition, the low current ration implies lack of liquidity (1.78 for 1986). Therefore, the company needs to rely heavily on outside financing to meet maturing obligations since there is no operating income.
Market value proportions of: Debt = $1,147,200 / $4,897,200 = 23.4% Pref. Share = $1,250,000 / $4,897,200 = 25.5% Common equity = $2,500,000 / $4,897,200 = 51.1%
4) Company Q’s current rate of return (ROE) is 14%. It pays out (payout ratio) half of its earnings as dividends. Current book value is $50 per share. Book value per share will grow as Q reinvests earnings.
Bodie Industrial Supply has funded itself mostly through loans. These loans include a bank loan, transport loan, mortage payable and CCB mortage payable. They took out a loan in 2005 in order to pay for the purchase of land, building and equipment. Liz Bodie expects sales growth to increase in 2007 and thus needs funding to build an extension to the warehouse to hold more inventory. Looking at BIS’s cashflow statements, you notice a significant increase in net cash flow from financing from 2005-2006. There is also an increase from the cash flow of operations from 2005-2006. In 2005 net cash flow was -$13,500 and increased rapidly in 2006 to a healthy net cash flow of $49,720. Based on current ratio, the company is losing liquidity, decreasing from 2.63 in 2004 to 1.52 in 2006. The quick ratio is another indication
Weight of Equity = 71%; Equity Cost of Capital = 12%; Weight of Debt = 29%; Debt Cost of Capital = 4.55%