Module 5 Problems

Ch 10: Analysis of Fin. Statements

Questions:  8

Give an example of how a cash flow ratio might differ from a proportion of debt ratio. Assuming these ratios differ for a firm (e.g., the cash flow ratios indicate high financial risk, while the proportion of debt ratio indicates low risk), which ratios would you follow? Justify your choice.

Questions:  15

Select one of the limitations of ratio analysis and indicate why you believe it is a major concern.

Problems:  3

Given the following balance sheet, fill in the ratio values for 2013 and discuss how these results compare with both the industry average and prior average performance of Sophie Enterprises. 
SOPHIE ENTERPRISES CONSOLIDATED BALANCE SHEET, 
YEARS ENDED DECEMBER 31, 2012 AND 2013

Assets ($ Thousands) 2013 2012 2013
Cash $100 $90 
Receivables $220 $170 
Inventories $330 $230 
Total Current Assets $650 $490 
Property, Plant, and Equipment $1,850 $1,650 
Depreciation $(330) $(225)
Net Properties $1,520 $1,425 
Intangibles $150 $150 
Total Assets $2,320 $2,065 
LIABILITIES AND SHAREHOLDERS' EQUITY
2013 2012

Accounts Payable $85 $105 
Short-Term Bank Notes $125 $110 
Current Portion of Long-term Debt $75 $- 
Accruals $65 $85 
Total Current Liabilities $350 $300 
Long-Term Debt $625 $540 
Deferred Taxes $100 $80 
Preferred Stock (10%, $100 par) $150 $150 
Common Stock ($2 par, 100,000 issued) $200 $200 
Additional Paid-in Capital $325 $325 
Retained Earnings $550 $470 
Common Shareholders' Equity $1,950 $1,765 
Total Liabilities and Shareholders' Equity $2,300 $2,065 
SOPHIE ENTERPRISES CONSOLIDATED STATEMENT OF INCOME,

YEARS ENDED DECEMBER 31, 2012 AND 2013 ($ THOUSANDS)

2013 2012

Net Sales $3,500 $2,990 
Cost of Goods Sold $2,135 $1,823 
Selling, General, and Administrative Expenses $1,107 $974 
Operating Profit $258 $193 
Net Interest Expense $(62) $(54)
Income from Operations $196 $139 
Income Taxes $(66) $(47)
Net Income $130 $92 
Preferred Dividends $(15) $(15)
Net Income Available for Common Shares $115 $77 
Dividends Declared $40 $30 
SOPHIE SOPHIE'S INDUSTRY
(2013) AVERAGE AVERAGE

Current Ratio 2.000 2.200
Quick Ratio 1.000 1.100
Receivables Turnover 18.000 18.000
Average Collection Period 20.000 20.000
Total Asset Turnover 1.500 1.400
Inventory Turnover 11.000 12.500
Fixed Asset Turnover 2.500 2.400
Equity Turnover 3.200 3.000
Gross Profit Margin 0.400 0.350
Operating Profit Margin 8.000 7.500
Return on Capital 0.107 0.120
Return on Equity 0.118 0.126
Return on Common Equity 0.128 0.135
Deb-Equity Ratio 0.600 0.500
Debt-Total Capital Ratio 0.400 0.370
Interest Coverage 4.000 4.500
Fixed Charge Coverage 3.000 4.000
Cash Flow-Long Term Debt 0.400 0.450
Cash Flow-Total Debt 0.250 0.300
Rentention Rate 0.350 0.400

Problem 4

(Question 4 is composed of two parts.) The DuPont formula defines the net return on
shareholders� equity as a function of the following components:
� Operating margin
� Asset turnover
� Interest burden
� Financial leverage
� Income tax rate
Using only the data in the table shown below:
a. Calculate each of the five components listed above for 2010 and 2014, and calculate the
return on equity (ROE) for 2010 and 2014, using all of the five components. Show
calculations.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the
change in ROE from 2010 to 2014.

DONE

Ch 11: Intro to Security Valuation

Questions:  11

Under what conditions will it be ideal to use one or several of the relative valuation ratios to evaluate a stock?

Question 12

Discuss a scenario where it would be appropriate to use one of the present value of cash flow techniques for the valuation.

Problems:  7

Based on new information regarding the popularity of basketball, you revise your growth
estimate for BBC to 9 percent. What is the maximum P/E ratio you will apply to BBC,
and what is the maximum price you will pay for the stock?

Problem 14

You have been reading about the Madison Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent.

a. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Discuss your answer.

b. What would you pay for Madison Computer if its retention rate was 60 percent and its ROE was 19 percent? Show your work.