INVESTMENTS+ACCESS
11th Edition
ISBN: 9781260665291
Author: Bodie
Publisher: MCG
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Chapter 19, Problem 4CP
Summary Introduction
(A)
Adequate information:
| Components | Quick brush company(in $) | Smile white corporation (in $) |
| Net Profit | 445 | 4850 |
| Pretax Profit | 660 | 7350 |
| EBIT | 660 | 7700 |
| Sales | 7760 | 119200 |
| Assets | 5470 | 33600 |
| Equity | 3720 | 22700 |
| Dividend per share | 0 | 1.72 |
| Earnings Per Share(EPS) | 1.18 | 2.62 |
Requirement 1: To calculate and analyze five components that determine
Introduction:
Return on Equity measures the financial performance of the company by focusing only on the profitability of equity investments. It is expressed as:
Though in Du-pont system, the return on equity is decomposed into five components. Thus decomposed return on equity is calculated as:
= Tax burden X Interest burden X Margin X Turnover X Leverage
Expert Solution
Explanation of Solution
Calculation of Return on Equity using five components for Quick Brush company and smile white corporation.
Conclusion
Though the Margin for profits in Quick Brush Company (8.5%) is more than Smile White Corporation(6.4%), but the Return on equity is less in Quick brush company(11.87%) as compared to Smile white corporation(21.12%). Thus Quick Brush company is not profitable from shareholders point. Also the Turnover of assets in Quick brush is also less (1.41) as compared to Smile White Corporation which shows that Quick brush company earns less from its total assets as compared to Smile white corporation.
Summary Introduction
Requirement 2: To calculate and analyze ROE and plowback ratios that determine sustainable growth.
Introduction:
The sustainable growth is the maximum growth rate that a firm can sustain without having to lookout for outside finance. It is multiple of return on equity and retention ratio. It is calculated as:
Sustainable Growth
Expert Solution
Explanation of Solution
Calculation of Sustainable growth
Conclusion
Since the sustainable growth rate shows the firm's dependency on dividend policy and profitability, thus here the analyst- Janet Ludlow is confident on both the firm's sustainable growth rate.
Summary Introduction
(B)
To explain that the Quick Brush Company is having average annual Earning per share growth rate of 40% in last two years though the Return on Equity is declining in two years.
Introduction:
Earning per share is the portion of a firm's profit allocated to each share of common stock. A firm with high Earning per share ratio means that it is capable of generating high dividends for investors of common stock or it may plow back funds for business growth.
Return on Equity measures the financial performance of the company by focussing only on the profitability of equity investments. It is expressed as:
Expert Solution
Answer to Problem 4CP
Quick Brush Company has growing Earning Per Share but declining ROE because it has increased its book value per share over the period of two years.
Explanation of Solution
Quick Brush Company has a declining Return On Equity because it had
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BendOR, Inc., manufactures control panels for the electronics industry and has just completed its first year of operations. The following discussion took place between the controller, Gordon Merrick, and the company president, Matt McCray:
Matt: I’ve been looking over our first year’s performance by quarters. Our earnings have been increasing each quarter, even though our sales have been flat and our prices and costs have not changed. Why is this?
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You are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve collected data from the companies’ financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.)
Data Collected (in dollars)
Like Games
Our Play
Industry Average
Accounts receivable
2,700
3,900
3,850
Net fixed assets
55,000
80,000
216,750
Total assets
95,000
125,000
234,600
Using this information, complete the following statements to include in your…
You are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $200,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $510,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve collected data from the companies’ financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.)
Data Collected (in dollars)
Like Games
Our Play
Industry Average
Accounts receivable
5,400
7,800
7,700
Net fixed assets
110,000
160,000
433,500
Total assets
190,000
250,000
469,200
Using this information, complete the following statements to include in your…
Chapter 19 Solutions
INVESTMENTS+ACCESS
Ch. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - Prob. 5PSCh. 19 - Prob. 6PSCh. 19 - Prob. 7PSCh. 19 - Prob. 8PSCh. 19 - Prob. 9PSCh. 19 - Prob. 10PS
Ch. 19 - Prob. 11PSCh. 19 - Prob. 12PSCh. 19 - Prob. 13PSCh. 19 - Prob. 14PSCh. 19 - Prob. 15PSCh. 19 - Prob. 16PSCh. 19 - Prob. 1CPCh. 19 - Prob. 2CPCh. 19 - Prob. 3CPCh. 19 - Prob. 4CPCh. 19 - Prob. 5CPCh. 19 - Prob. 6CPCh. 19 - Prob. 7CPCh. 19 - Prob. 8CPCh. 19 - Prob. 9CPCh. 19 - Prob. 10CPCh. 19 - Prob. 11CPCh. 19 - Prob. 12CPCh. 19 - Prob. 13CP
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