Financial Accounting
9th Edition
ISBN: 9781259222139
Author: Robert Libby, Patricia Libby, Frank Hodge Ch
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 13, Problem 13.4ME
Computing the Financial Leverage Percentage
Compute the financial leverage percentage for Year 2 given the following data:
| Year 2 | Year 1 | |
| Return on equity | 21.00% | 26.00% |
| Return on assets | 6.00 | 8.00 |
| Profit margin | 12.00 | 12.00 |
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
DIRECTION: Compute the following
PROFITABILITY RATIOS
Gross Margin= Gross Profit/Net Sales
Net Profit Margin= Net Profit/ Net Sales
Return on Equity= Profit/Shareholder's Equity
Return on Asset= Profit/Total Asset
TREND ANALYSIS
Net Income Growth Rate
Total Assets Growth Rate
And also compute the percentage beside the columns
December 31,
December 31,
PERCENTAGE
2021
2020
USD
USD
Assets
Current assets
Cash and cash equivalents
34,115,412
25,681,845
Short-term financial instruments
71,417,748
80,798,680
Short-term financial assets at amortized cost
2,944,705
2,409,853
Short-term financial assets at fair value through profit or loss
35,624
62,452
Trade receivables
35,585,565
27,065,012
Non-trade receivables
3,930,828
3,150,548
Prepaid expenses
2,042,001
1,980,685
Inventories
36,172,043
28,007,314
Other current assets
4,441,629
3,281,589
Assets held-for-sale
-
812,370
Total Current Assets…
Using the Du Pont Identity Method, calculate return on equity given the following information. Profit margin 16%;
total asset turnover 0.85; equity multiplier 1.5.
OA.
OB.
O C.
O D.
OE
20.40%
21.40%
22.40%
23.40%
24.40%
a. Perform a Du Pont analysis on Green Valley. Assume that the
industry average ratios are as follows:
Total margin
3.5%
Total asset turnover
1.5
Equity multiplier
2.5
Return on equity (ROE)
13.1%
b. Calculate and interpret the following ratios:
Industry Average
Return on assets (ROA)
Current ratio
5.2%
2.0
Days cash on hand
22 days
Average collection period
19 days
Debt ratio
71%
Debt-to-equity ratio
2.5
Times interest earned (TIE) ratio
2.6
Fixed asset turnover ratio
1.4
c. Assume that there are 10,000 shares of Green Valley's stock
outstanding and that some recently sold for $45 per share.
• What is the firm's price/earnings ratio?
What is its market/book ratio?
(Hint: These ratios are discussed in the supplement to this
chapter.)
Chapter 13 Solutions
Financial Accounting
Ch. 13 - Who are the primary users of financial statements?Ch. 13 - When considering an investment in stock, investors...Ch. 13 - How does product differentiation differ from cost...Ch. 13 - What are the two general methods for making...Ch. 13 - What are component percentages? Why are they...Ch. 13 - What is ratio analysis? Why is it useful?Ch. 13 - What do profitability ratios focus on? What is an...Ch. 13 - What do turnover ratios focus on? What is an...Ch. 13 - What do liquidity ratios focus on? What is an...Ch. 13 - What do solvency ratios focus on? What is an...
Ch. 13 - What do market ratios focus on? What is an example...Ch. 13 - Prob. 12QCh. 13 - Explain why rapid growth in total sales might not...Ch. 13 - A company has total assets of 500,000 and...Ch. 13 - Prob. 2MCQCh. 13 - Prob. 3MCQCh. 13 - Prob. 4MCQCh. 13 - Prob. 5MCQCh. 13 - Prob. 6MCQCh. 13 - Prob. 7MCQCh. 13 - Prob. 8MCQCh. 13 - Prob. 9MCQCh. 13 - Prob. 10MCQCh. 13 - Prob. 13.1MECh. 13 - Prob. 13.2MECh. 13 - Prob. 13.3MECh. 13 - Computing the Financial Leverage Percentage...Ch. 13 - Analyzing the Inventory Turnover Ratio A...Ch. 13 - Prob. 13.6MECh. 13 - Prob. 13.7MECh. 13 - Prob. 13.8MECh. 13 - Prob. 13.9MECh. 13 - Prob. 13.10MECh. 13 - Using Financial Information to Identify Companies...Ch. 13 - Prob. 13.2ECh. 13 - Prob. 13.3ECh. 13 - Prob. 13.4ECh. 13 - Prob. 13.5ECh. 13 - Prob. 13.6ECh. 13 - Prob. 13.7ECh. 13 - Prob. 13.8ECh. 13 - Prob. 13.9ECh. 13 - Prob. 13.10ECh. 13 - Inferring Financial Information from Ratios E13-11...Ch. 13 - Prob. 13.12ECh. 13 - Prob. 13.13ECh. 13 - Prob. 13.1PCh. 13 - Prob. 13.2PCh. 13 - Prob. 13.3PCh. 13 - Prob. 13.4PCh. 13 - Prob. 13.5PCh. 13 - Computing Comparative Financial Statements and...Ch. 13 - Analyzing Financial Statements Using Ratios Use...Ch. 13 - Prob. 13.8PCh. 13 - Prob. 13.9PCh. 13 - Prob. 13.1APCh. 13 - Prob. 13.2APCh. 13 - Calculating Profitability, Turnover, Liquidity,...Ch. 13 - Prob. 13.4APCh. 13 - Prob. 13.5APCh. 13 - Prob. 13.6APCh. 13 - Prob. 13.1CPCh. 13 - Prob. 13.2CPCh. 13 - Comparing Companies within an Industry Refer to...Ch. 13 - Prob. 13.4CPCh. 13 - Inferring Information from the DuPont Model Ratios...Ch. 13 - Prob. 13.6CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Financial leverage MicrosoCortrepotied (MSFT) reported the following data (in millions) for a tern year Compute the profit margin, asset turnover, and financial leverage metrics using the expandedDuPont formula. Round profit margin, asset turnover, and financial leverage to two decimalplaces.Round return on stockholders’ equity to one decimal place.arrow_forwardANALY SIS OF LEVERAGE Based on the financial statement data in Exercise 24-1A, compute the following leverage measures for 20-2 (round all calculations to two decimal places): (a) Debt-to-equity ratio (b) Times interest earned ratio (Bond interest is 24,200.) (c) Assets-to-equity ratioarrow_forwardThe income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.arrow_forward
- Assignment 1: Financial Statement Analysis and Interpretation of the Results • Select two different corporations (from the same industry) publicly traded in the US Stock Exchange Markets. (NYSE, NASDAQ) o Make sure the companies you select are traded in same currency (USD, Euro, GBP) o Please get the approval for the names of the firm before you start your work. • The analysis of same company by different students will not be graded • Download the necessary financial statements for the companies for 2021 and 2020 o For data collection you can use: finance.yahoo.com or finance.google.com Part 1: Apply the financial analysis for the last two years using ratios covered in Chapter 3. Use excel formulas for calculation of the ratios on a separate sheet (manual calculations will not be graded!) You are not responsible for Part 5 (V. Market Value) ratios Some companies may not have all the data due to their variations in industries. If you face missing data just skip that ratio (mention as…arrow_forwardRatio Industry GnG Ratios Ratios 1. Net Income Margin 7.5% 18.2% 2. Receivable Turnover Ratio 9. 14.41 3. Return on Asset Ratio 12% 9.29% 4. Debt to Asset Ratio 1:4 1:1 Interpretation and verbal analysis compared to industry ratios: 1. Liquidity 2. Profitability 3. Solvencyarrow_forwardConsider the table given below to answer the following question. Year Asset value Earnings Net investment Free cash flow Return on equity Asset growth rate Earnings growth rate 1 9.00 1.44 1.44 0.00 0.16 0.16 Present value 2 10.44 1.67 1.67 0.00 0.16 0.16 0.16 million 3 4 5 12.11 14.05 15.87 1.94 2.54 2.25 1.94 1.83 2.06 0.00 0.42 0.48 0.16 0.16 0.16 0.16 0.13 0.13 0.16 0.16 0.13 6 7 17.94 20.27 2.78 2.33 0.45 0.155 0.13 0.09 3.04 2.03 1.01 0.15 0.10 0.09 8 9 22.30 24.53 3.23 2.94 2.23 2.45 1.00 0.49 0.145 0.12 0.10 0.10 0.06 -0.09 Assuming that competition drives down profitability (on existing assets as well as new investment) to 15.5% in year 6, 15% in year 7, 14.5% in year 8, and 12% in year 9 and all later years. What is the value of the concatenator business? Assume 13% cost of capital. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. 10 26.98 3.24 2.70 0.54 0.12 0.10 0.10arrow_forward
- Analyze the following ratios (Good/Not good, Undervalued/Overvalued, or just OK) based on the given industry averages. Ratios Annual Data Industry Average Interpretation Current 5.7 4 Days Sales Outstanding 37 days 42 days Total Debt to Total Capital 47.80% 32.60% Times-Interest Earned 2.2 6 Profit Margin 6.10% 6.00% Return on Invested Capital 10.03% 10.00% Enterprise Value to EBITDA 0.87 1.12 Provide a decision for each analysis.arrow_forwardCurrent Assets - CurrentLiabilities = Calculated Value 1. Working capital: Ratio Numerator ÷ Denominator = Calculated Value 2. Current ratio 3. Quick ratio 4. Accounts receivable turnover 5. Number of days' sales in receivables 6. Inventory turnover 7. Number of days' sales in inventory 8. Ratio of Fixed assets to long-term liabilities 9. Ratio of liabilities to stockholders' equity 10. Times interest earned 11. Asset turnover 12. Return on total assets…arrow_forwardRequired: Compute the following: (For Requirements 1 to 4, enter your percentage answers rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 1. Gross margin percentage. 2. Net profit margin percentage. 3. Return on total assets. 4. Return on equity. 5. Was financial leverage positive or negative for the year? 1. Gross margin percentage % 2. Net profit margin percentage % 3. Return on total assets % 4. Return on equity % 5. Financial Leveragearrow_forward
- The following information is given with respect to the ratio of two companies Aman LTD Roger LTD Current Ratio 2:01 1.60:1 Quick Ratio 1.35:1 1:01 Returns On investment 15% 13% Debt Equity Ratio 2:5:1 1:01 Define the concepts of Current and Quick ratio’s and also, reflect on your understanding towards the financial performance of the companies by looking to the above information? 3 b. Define the terms- Return on Investment and Debt equity ratio and also, reflect on your understanding towards the financial performance of the companies?arrow_forward× Task 1: Consider the company's financials over the most recent years: Fiscal year Return on Equity Net Profit Margin Total Asset Turnover 2020 5.92% 3.33% 2019 1.66% 1.11% 2018 1.62% 1.13% 2017 -0.62% -0.47% 1.11 0.95 0.93 0.84 Evaluate the reasons behind the trend in return on equity (ROE). Leverage 1.60 1.58 1.54 1.60arrow_forwardBased on the given information calculate financial leverage. Net worth rs 25,00,000 debt/equity 3:1 intreset rate 12% operating profit rs.2,00,000 a.2.43 b.2.16 c.1.82 d.2.11arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
College Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
College Accounting, Chapters 1-27
Accounting
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:Cengage Learning,
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
How To Analyze an Income Statement; Author: Daniel Pronk;https://www.youtube.com/watch?v=uVHGgSXtQmE;License: Standard Youtube License