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CHAPTER 4 PROBLEMS

EVALUATING A FIRM'S FINANCIAL PERFORMANCE

PROBLEM 4-1
RATIO ANALYSIS

DATA
Target current ratio: 2
Current assets 2,145,000
Current Liabilities 858,000

Additional Inventories =

PROBLEM 4-2
RATIO ANALYSIS

DATA
Sales 65,000,000
Total Assets 42,000,000
Total Liabilites 20,000,000
Interest rate 6%
Tax rate 30%
Operating margin 12%

OROA
ROE

PROBLEM 4-3
RATIO ANALYSIS

DATA
Sales 400,000
Cost of goods sold 112,000
Operating expenses 130,000
Increase in retained earnings 58,000
Common stock outstanding 22,000
Dividend per share 1.6
Tax rate 0.34

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A.
Income Statement:
Net sales 400,000
COGS 112,000
Gross profit 288,000
Operating expenses 130,000
Operating income 158,000
Interest expense 158,000
Income before taxes
Tax
Net income

B.
Operating profit margin

C.
Times interest earned

PROBLEM 4-4
RATIO ANALYSIS

Stockholders' equity 750,500


Earnings per share $3

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Price/Earnings ratio 12.25
Common stock outstanding 50,000

Price/book

PROBLEM 4-5
RATIO ANALYSIS

DATA
Target current ratio: 2.0
Current ratio: 2.5
Current assets: $2,500,000
Current liabilities: $1,000,000

Additional short-term funding =

PROBLEM 4-6
RATIO ANALYSIS

DATA
Balance Sheet:
Cash 500
Acct/Rec 2,000
Inventories 1,000
Current assets 3,500
Net fixed assets 4,500
Total assets 8,000

Accts/Pay 1,100
Accrued expenses 600
Short-term N/P 300
Current liabilities 2,000
Long-term debt 2,000
Owner's equity 4,000
Total liabilities and owers equity 8,000

Income Statement:
Net sales 8,000
COGS 3,300

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Gross profit 4,700
Operating expenses 3,000
Net operating income 1,700
Interest expense 367
EBT 1,333
Income taxes 533
Net income 800

Calculate the following ratios:


Current ratio =
Debt ratio =
Times interest earned =
Average collection period =
Inventory turnover =
Fixed asset turnover =
Total asset turnover =
Gross profit margin =
Operating profit margin =
Operating return on assets =
Return on equity =

PROBLEM 4-7
ANALYZING OPERATING RETURN ON ASSETS

DATA
Operating profit margin: 10.00%
Sales: 10,000,000
Total assets: 5,000,000

A)Total asset turnover ratio:

B)
Goal of total asset turnover: 4
Amount of sales increase
Growth rate on Sales =

C)
OROA for last yr:
OROA for next yr:

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PROBLEM 4-8
USING FINANCIAL RATIOS

DATA
Gross profit margin: 0
Sales: 9,000,000
Sales on credit: 1
Current assets: 1,500,000
Current liabilities: 300,000
Cash and marketable sec: 100,000

A)
Accts/Rec 562,500

Average collection pd =

B)
Average collection pd = 20

New Acct/Rec =
Reduce =

C)
Inventory turnover ratio: 9

Level of inventories =

PROBLEM 4-9
RATIO ANALYSIS

DATA
Balance Sheet 2005 2006
Assets:
Cash 200 150
Accts/Rec 450 425
Inventory 550 625
Current assets 1,200 1,200
Plant and equip. 2,200 2,600
Less: Acc dep 1,000 1,200
Net plant and equip. 1,200 1,400

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Total assets 2,400 2,600

Liabilities and Owners' Equity: 2005 2006


Accts/Pay 200 150
Notes Pay-Current 0 150
Current liabilities 200 300
Bonds 600 600
Owners' equity
Common stock 300 300
Paid-in Capital 600 600
Retained earnings 700 800
Total owners' equity 1,600 1,700
Total liabilities and owners' equity 2,400 2,600

Income Statement: 2005 2006


Sales $1,200 $1,450
COGS 700 850
Gross profit 500 600
Operating expenses 30 40
Depreciation 220 200
Net operating income 250 360
Interest expense 50 64
Net income before tax 200 296
Taxes (40%) 80 118
Net income $120 $178

A)
2005 2006
Current ratio =
Acid test ratio =
Inventory turnover =
Average collection pd =
Debt ratio =
Times int earned =
Total asset turnover =
Fixed asset turnover =
Oper profit margin =
Return on common equity =

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Operating return on equity =

PROBLEM 4-10
FINANCIAL RATIOS-INVESTMENT ANALYSIS

DATA
Current Assets 500,000
Net Fixed Assets 1,500,000
Total Assets 2,000,000

Liabilities 1,000,000
Owners' Equity 1,000,000
Total Liabilities and Owners' Equity 2,000,000

Income Statement
Sales 4,500,000
Less: COGS 3,500,000
Gross Profit 1,000,000
Less: Oper Exp 500,000
Net Oper Income 500,000
Less: Interest Exp 100,000
EBT 400,000
Less: Taxes 200,000
Net Income 200,000

A)
Total asset turnover =
Operating profit margin =
Operating return on assets =

B)
Added plant & equip 1,000,000
Present debt ratio 0.50
New Oper profit margin 0.13

New Operating return on assets =

C) Post: Pre:
NOI 585,000 500,000
Less: Interest 150,000 100,000

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EBT 435,000 400,000
Less: Taxes (50%) 217,500 200,000
Net Inc Available to Common 217,500 200,000

Post Renovation Analysis:


Return on Common Equity =

Pre-renovation Analysis:
Return on Common Equity =

PROBLEM 4-11
FINANCIAL ANALYSIS

DATA
Balance Sheets 2005 2006
Assets
Cash 15,000 14,000
Mrktable securities 6,000 6,200
Accts receivable 42,000 33,000
Inventory 51,000 84,000
Prepaid rent 1,200 1,100
Total current assets 115,200 138,300
Net plant and equip 286,000 270,000
Total assets 401,200 408,300

Liabibliities and Stockholders' Equity: 2005 2006


Accts payable 48,000 57,000
Notes payable 15,000 13,000
Accruals 6,000 5,000
Total current liabilities 69,000 75,000
Long-term debt 160,000 150,000
Common Stockholders' equity 172,200 183,300
Total liabilities and equity 401,200 408,300

Income Statement
Sales 600,000
Less: COGS 460,000
Gross profit 140,000
Less: Expenses
General and Adm. 30,000

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Interest 10,000
Depreciation 30,000
Total 70,000
Profit before taxes 70,000
Less: Taxes 27,100
Profits after taxes 42,900
Less: Cash dividends 31,800
To R/E 11,100

Ratio Jarmon Norm


Current ratio 1.80
Acid test ratio 0.90
Debt ratio 0.50
Times interest earned 10.00
Average collection period 20.00
Inventory turnover 7.00
Return on common equity 12.0%
Operating return on assets 16.8%
Operating profit margin 14.0%
Total asset turnover 1.20
Fixed asset turnover 1.80

PROBLEM 4-12
ECONOMIC VALUE ADDED

DATA
OIROI 0.12
Opportunity cost of funds 0.14
Total assets 100

Economic Value Added

COMPREHENSIVE PROBLEM

DATA
PepsiCo Coca-Cola
2003 2003
Sales $26,971 $21,044
Cost of goods sold 11,359 7,159
Gross profit 15,612 13,885

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Selling, general, and administrative expenses 9,460 7,488
Impairment of long-lived assets 0 0
Depreciation and amortization 1,165 667
Operating profit 4,987 5,730
Interest expense 163 178
Non-operating income/expense 168 444
Extraordinary items 0 (501)
Pretax income 4,992 5,495
Provision for income taxes 1,424 1,148
Net income $3,568 $4,347

Annual Balance Sheet ($ millions) PepsiCo Coca-Cola Co


At 12/31/2003 2003 2003
Assets
Cash & equivalents $2,001 $3,482
Accounts receivables 2,830 2,091
Inventories 1,412 1,252
Other current assets 687 1,571
Total current assets 6,930 8,396

Gross plant, property & equipment 14,755 9,622


Accumulated depreciation 7,170 3,757
Net plant, property & equipment 7,585 5,865
Investments 2,920 5,224
Intangibles 5,383 3,989
Other assets 2,509 3,868
Total assets $25,327 $27,342

Liabilities:
Long term debt due in one year $0 $0
Notes payable 145 2,583
Accounts payable 1,638 4,058
Taxes payable 611 922
Accrued expenses 2,245 0
Short-term borrowings 0 0
Other current liabilities 1,776 323
Total current liabilities 6,415 7,886

Long term debt 1,702 2,517


Deferred taxes 1,261 337

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Other liabilities 4,075 2,512

Preferred Stock (22) 0


Common stock 30 874
Capital surplus 548 4,395
Retained earnings 14,694 24,692
Curency translation 0 0
Treasury stock (3,376) (15,871)
Total equity 11,874 14,090
Total liabilities and equity $25,327 $27,342

Solution
PepsiCo Coca-Cola
Current ratio
Acid-test ratio
Average collection period
Accounts receivable turnover
Inventory turnover
Operating income return on investment
Gross profit margin
Operating profit margin
Total asset turnover
Fixed asset turnover
Debt ratio
Times interest earned
Return on equity (before taxes)
Return on equity (before extra. items and taxes)

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MANCE

shares

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shares

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Industry
Norm
5.00
3.00
2.20
90.00
0.33
7.00
0.75
1.00
0.20
0.09

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0.15

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million

million

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Industry
Norms
1.20
0.70
27.90
13.10
15.00
0.13
0.30
0.06
2.10
6.60
0.71
2.80
0.19

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