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Evaluating the Impact of Capitalized Interest on
You are a financial analyst charged with evaluating the asset efficiency of companies in the hotel industry. Recent financial statements for Marriott International include the following note:
12. PROPERTY AND EQUIPMENT
We record property and equipment at cost, including interest and real estate taxes we incur during development and construction. Interest we capitalized as a cost of property and equipment totaled $33 million in 2014, $31 million in 2013, and $27 million in 2012. We capitalize the cost of improvements that extend the useful life of property and equipment when we incur them. These capitalized costs may include structural costs, equipment, fixtures, floor, and wall coverings.
Required:
- 1. Assume that Marriott followed this policy for a major construction project this year. How does Marriott’s policy affect the following (use + for increase, − for decrease, and NE for no effect)?
- a. Cash flows.
- b. Fixed asset turnover ratio.
- 2. Normally, how would your answer to requirement (1b) affect your evaluation of Marriott’s effectiveness in utilizing fixed assets?
- 3. If the fixed asset turnover ratio decreases due to interest capitalization, does this change indicate a real decrease in efficiency? Why or why not?
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Chapter 8 Solutions
GB 112/212 MANAGERIAL ACC. W/ACCESS >C<
- Which of the following statements is true? a. The fixed asset turnover ratio assists managers in determining the estimated future capital expenditures that are needed. b. The average age of the fixed assets is computed by dividing accumulated depreciation by depreciation expense. c. If net sales increases, the fixed asset turnover ratio will decrease. d. A relatively low fixed asset turnover ratio signals that a company is efficiently using its assets.arrow_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_forwardYou are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the course of 2018…arrow_forward
- You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the course of 2018…arrow_forwardReferring to the following data of the Omani Company, that extracted from the balance sheet at 31122019. answer the following questions: (Note; Write all Equations regarding the questions) 1. The company manager targets to reduce the current ratio in the year (2020) by 33% from the previous year (2019), this requiring to downsize the amount of the total current asset. To what level can the manager reduce the total current asset to achieve this target at (2020)? (Suppose the other things are fixed) 2. The manager put a plan to reduce the selling period in the (2020) by (16.7%) from the previous year (2019). Calculate the new inventory turmover. (Suppose the other things are fixed) Data of 2019 Total Asset Turmover 2 Times Net Fixed Asset 400 (Thousand OMR) 400 (Thousand OMR) 2000 (Thousand OMR) Total Liabilities Sales Quick Ratio 1.5 Times Accounts Receivable 150 (Thousand OMR) 200 (Thousand OMR) Long-term Liabilitiesarrow_forwardThe DuPont equation shows the relationships among asset management, debt management, and -Select- ROE = Profit margin x Total assets turnover x Equity multiplier Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select- Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below. Balance Sheets: Cash and equivalents Accounts receivable Inventories Total current assets Net plant and equipment Total assets Accounts payable Accruals Notes payable Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity Sales Operating costs excluding depreciation EBITDA Depreciation and amortization EBIT Interest EBT Taxes (25%) Net income Income Statements: Dividends paid Addition to retained earnings Shares outstanding Price WACC 2019 $100 Ś 85 275 300 375 350 750 $ 735 2,000 1,490 $2,750…arrow_forward
- You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: Table 1: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the…arrow_forwardYou are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: Table 1: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the…arrow_forwardYou are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: Table 1: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the…arrow_forward
- You are a financial Manager of Chevron Corp. You need to assess the effectiveness of working capital management of the company for 2018 using the following data. What is the 2018 Receivable turnover? 2017 Account Receivable = 15,353 000 2018 Account Receivable = 15.050,00O 2017 Inventory = 5,585.000 2018 Inventory = 5 704.00O 2017 Accounts Payable= 14 565 00I 2018 Accounts Payable = 13 953 000 2017 Sales 134,674 000 2018 Sales 158.902 000. 2017 Cost of Sales = 95 114.000 2018 Cost of Sales = 113 997 000 2017 Purchases= 95 114 000 2018 PurchaSes = 123 435 000arrow_forwardBased on the data below, solve the following. Company A Financial leverage Net profit margin Total asset turnover Industry Financial leverage Net profit margin Total asset turnover 2019 1.75 0.059 2.11 1.67 0.054 2.05 2020 1.75 0.058 2.18 1.69 0.047 2.13 (i) Construct the ROE for Company A for the three years. (ii) Evaluate Company A (and the industry) over the 3-year period. (iii) Which area does Company A need improvement? 2021 1.85 0.049 2.34 1.64 0.041 2.15arrow_forwardAs part of your analysis, you are required to investigate Carrium Insights Inc. cash flows and compute selected financial ratios using the financial statements provided A company’s asset utilization or turnover ratios are intended to display how efficiently or intensively a firm uses its assets to generate sales. Calculate the following turnover ratios for 2020: Inventory Turnover Days’ sales in inventory NWC Turnover Total Asset Turnoverarrow_forward
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