PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Question
Chapter 28, Problem 5PS
Summary Introduction
To discuss: The correct definitions.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Methodology:• Based on the above information the consulting group will conduct ratio analysis for the following ratios:o Current ratio o Receivable’s turnover o Times’s interest earned o Profit margin o Days in inventory o Return on assets o Cash current debt coverage ratio • As a next step the group will compare the ratios calculated above with industry benchmarks. The benchmarks are indicated within brackets besides each ratio.o Current ratio (3 to 1) o Receivable’s turnover (13 times) o Times’s interest earned (9 times) o Profit margin (12%) o Days in inventory (50 days) o Return on assets (12%) o Cash current debt coverage ratio (2 times
Impact of transactions on ratios
Analyse the effect of each of the following transactions on the current ratio, quick ratio, debt-to-equity ratio and earnings per share.
Assume that the current ratio, quick ratio and debt-to-equity ratio are each greater than 1, and that earnings per share is positive.
Determine if the ratio increases, decreases or is unchanged.
Consider each transaction independently of all the other transactions.
1 Repaid short-term loans payable of $51 000.
2 Purchased inventory of $48 000 on cash.
3 Made repayments of $78 000 on the long-term loan.
4 Declared, but did not pay, a $31 000 cash dividend on shares.
5 Borrowed an additional $56 000 on the long-term loan.
6 Sold short-term investments recorded in the balance sheet at $30 000 for $28 000.
7 Issued 140 000 shares at the beginning of the financial period for cash of $168 000.
8 Received $6000 owing in cash from a customer.
Using the statements provided
Calculate the following liquidity ratios:
Current ratio
Quick ratio
Calculate the following asset management ratios:
Average collection period
Inventory turnover
Fixed asset turnover
Total asset turnover
Calculate the following financial leverage ratios
Debt to equity ratio
Long-term debt to equity
Calculate the following profitability ratios:
Gross profit margin
Net profit margin
Return on assets
Return on stockholders’ equity
For example: you should present it like the text, or as:Gross margin = 1,933 divided by 8,689 = 22.2%
A competitor of ACME has for the same time period reported the following three ratios:
Current ratio 1.52Long-term debt to equity .25 or 25%Net profit margin .08 or 8%
Given these three ratios only which company is performing better on each ratio? Also overall who would you say has the best financial performance and position. Support your answer.
Chapter 28 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 28 - Prob. 1PSCh. 28 - Financial ratios Table 28.10 gives abbreviated...Ch. 28 - Performance measures Look again at Table 28.10. At...Ch. 28 - Prob. 5PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Book rates of return Keller Cosmetics maintains an...Ch. 28 - Prob. 8PSCh. 28 - Prob. 9PSCh. 28 - Prob. 10PSCh. 28 - Prob. 11PS
Ch. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Performance measures Describe some alternative...Ch. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Financial ratios Sara Togas sells all its output...Ch. 28 - Prob. 20PSCh. 28 - Prob. 21PSCh. 28 - Prob. 22PSCh. 28 - Prob. 23PSCh. 28 - Prob. 25PSCh. 28 - Prob. 26PSCh. 28 - Prob. 27PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Liquidity Ratios NWAs financial statements contain the following information: Note: Round answers to two decimal places. Required: 1. What is its current ratio? 2. What is its quick ratio? 3. What is its cash ratio? 4. Discuss NWAs liquidity using these ratios.arrow_forwardDefine each of the following terms: Liquidity ratios: current ratio; quick, or acid test, ratio Asset management ratios: inventory turnover ratio; days sales outstanding (DSO); fixed assets turnover ratio; total assets turnover ratio Financial leverage ratios: debt ratio; times-interest-earned (TIE) ratio; EBITDA coverage ratio Profitability ratios: profit margin on sales; basic earning power (BEP) ratio; return on total assets (ROA); return on common equity (ROE) Market value ratios: price/earnings (P/E) ratio; price/cash flow ratio; market/book (M/B) ratio; book value per share Trend analysis; comparative ratio analysis; benchmarking DuPont equation; window dressing; seasonal effects on ratiosarrow_forwardDefinitional problems: Listed are 11 terms that relate to ratio analysis:1. Book value per share2.Inventoryturnover3. Debt-to-equity ratio4. Average collection period5. Average sales period6. Return on common equity7. Earnings per share8. Price/earnings ratio9. Return on total assets10. Current ratio11. Accounts-receivable turnoverChoose the financial ratio or term from the list that most appropriately completes each of the following statements:1. The__________ tends to have an effect on the market price per share asreflected in the price/earnings ratio.2. The__________ indicates whether a stock is relatively cheap or relativelyexpensive in relation to current earnings. 3. The________ measures the amount that would be distributed to holders of common stock if all assets were sold at their balance-sheet carrying amount and if all creditors were paid off.4. The_____________ is a rough measure of how many times a company'saccounts…arrow_forward
- Profit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.7 Return on assets (ROA) 2% Return on equity (ROE) 6% Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. % Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardProfit Margin and Debt Ratio Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.5 Return on assets (ROA) 4% Return on equity (ROE) 7% Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: _______ % Liabilities-to-assets ratio: ______% Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. _______%arrow_forwardRatio Industry Ratios GnG Ratios 1. Current Ratio 5.3 2. Acid Test Ratio 5.1 3. Gross Profit Ratio 30% 4. Net Income Margin 7.5% 5. Receivable Turnover Ratio 9 6. Return on Asset Ratio 12% 7. Debt to Asset Ratio 1:4 Interpretation and verbal analysis compared to industry ratios: 1. Liquidity 2. Profitability 3. Solvency Computations:arrow_forward
- 17) Based on the balance sheet given for Just Dew It, calculate the following financial ratios for each year: current ratio quick ration cash ratio NWC to total assets ratio debt-equity ratio and equity multiplier Total debt ratio and long-term debt rationarrow_forwardEffect of transactions on ratios Indicate the effects (increase, decrease or no effect) of each of the following independent transactions on: 1. the rate of return on shareholders ’ equity 2. the current ratio 3. the debt-to-equity ratio. State any necessary assumptions. a) Inventory costing $410 000 is purchased on account. b) Inventory costing $240 000 is sold on account for $300 000. c) Collections from customers on accounts receivable total $100 000. d) Payments to suppliers on accounts payable total $160 000. e) A machine costing $80 000, on which $60 000 of depreciation was charged, is sold for $20 000. f) Dividends of $80 000 are declared. The dividends will be paid during the next accounting period. g) Ordinary shares are issued for $175 000. h) A machine costing $60 000 is acquired. Cash of $10 000 is given, and a note for $50 000 payable five years from now is signed for the balance of purchase price.arrow_forwardThe ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity. It is computed as follows: To illustrate, the ratio of liabilities to stockholders' equity for Lincoln Company is computed as follows Current 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…arrow_forward
- Compare the performance of Fly X to the Industry. For each ratio, comment on whether Fly X is positive or negative relative to the Industry. Median Industry Fly X Ratios Current Ratio 1.43X 1.45 Quick Ratio 0.84X 0.88 Total Asset Turnover Ratio 0.85 1.30 Inventory Turnover Ratio 6.15 12.10 Average Inventory Ratio 59.35 30.17 Receivables Turnover 9.82 13.08 Average Collection Period 37.17 27.90 Debt Ratio 0.52 0.39arrow_forwardWhich of the following financial measures are used to determine a company's credit rating? a)A company's current ratio, quick ratio, inventory turnover ratio, and default risk ratio b) Its ratio of annual interest payments to net profits, current ratio, working capital ratio, debt-equity ratio, and percentage return on capital employed c) Its loans outstanding as a percentage of total revenues, default risk ratio, inventory turnover ratio, and long-term debt-to-equity ratio d) Its total debt-equity ratio, current ratio, working capital ratio, and ratio of prior-year cash flow from operations to prior-year interest payments e) The percentage by which prior-year cash flow from operations covers a company's prior-year interest payments, the company's debt-asset ratio, its dividend payout ratio, and its default risk ratioarrow_forwardUsing the ratios below, summarize the financial performance of the company. LIQUIDITY RATIOS Current Ratio (times) 1.75 Quick Ratio (times) 0.52 Average Payment Period (days) 28.31 Days ASSET MANAGEMENT RATIOS Total Asset Turnover (times) 2.90 Average Collection Period (days) 24 Days Inventory Turnover (times) 5.70 FINANCIAL LEVERAGE RATIOS Total Debt to Total Assets 0.37% Equity Multiplier (times) 1.59 PROFITABILITY RATIOS Operating Profit Margin 5.66% Net Profit Margin 3.55% Return on Total Assets 16.57% Return on Equity 16.36% Earnings per Share $0.99arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License