HW - a Earnings per share = Earnings available for common...

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Unformatted text preview: a) Earnings per share = Earnings available for common stockholders / number of shares outstanding Earnings available for common stockholders: Net profit before taxes 436000 Less: Taxes = (436000 x 40%) 174400 Less: Preferred Stock Dividends 64000 Earnings available for common stockh. 197600 EPS b) 197600/170000 1.16235294 Common stock dividend = 170000 x 0.80 136000 Earnings available for common stockholders-Common stock dividends= This means that $61,600 would go to Retained Earnings. mber of shares outstanding 61600 a) Since the stocks in the portfolio all are from firms that operate in different industries, it is hard to conclude anything from these numbers. Since the ratios come from past performances of each stock, it is hard to predict future performance with them. Combining the fact that some ratios may only apply to a certain industry, it is hard to to forecast future performance. Current ratios for one industry can not be used for another. A good ratio in one industry can not be used to anticipate results in another. Since the stocks in the portfolio are nowhere close to each other in industries or performance results, they can not be directly compared by performance. b) Current ratios of 2.0 and quick ratio of 1.0 are usually quoted as acceptable. Yet again, the ratio also depends on the industry that the company that is being evluated has business in. Ratios also must be evaluated by the forecastability of an industry. The food industry will be easier to forecast than the automobile industry, since there is more risk involved in the later. Ratios of 1.1 and 1.3, as well as quick ratios of 0.9 and 0.82 are acceptable for the electric utility and fast food industries. Since those industries are easier to predict than others. c) The software business involves more risk than an electric utility business. As a standard rule, one can say that the bigger the debt content in the capital structure, the higher the risk for the company and the cost of capital. As debt increases, the long-term solvency of a company decreases. Software companies have a higher debt risk, since the companies depend on customers buying their products over competitors. Electric utility is a necessity in our society, and therefore it is easier for those companies to maintain good financial status in the long run. Paying periodical interest is also easier for electric utilities, since their income does not come in waves depending on releases, but on a more predictable, regular basis. d) Investors always aim for a high risk-return rate. Depending on how big the default risk of an investment, the risk-return rate must match it. For example, risk and uncertainty of return in the software industry is higher than in the electric utility industry. When being able to take default losses on financial investments, investors can take higher risks for bigger returns. Therefore, investors should always spread their investments and not gamble on one big one. Then, the risk can be controlled by investing either more into high risk - high pay investments, or more stable, lower paying investments. Although returns when making investments in electric utility are lower, returns are almost certain and the risks are much lower than when investing into other industries. nt atios ply to a s for one be used ere close y able. Yet ng ity of an ndustry, as quick dustries. s. As a tructure, ses, the igher s over easier for periodical e in waves he default and utility investors spread ntrolled ble, lower c utility hen 2012 2013 2014 2015 Current ratio 188.33% 173.81% 178.57% 155.17% Quick ratio 121.67% 119.05% 123.81% 113.79% Upward trend between 2012 and 2014. Both current ratio and quick ratio have risen each year. Current Ratio = Total current Assets / Total current Liabilities Quick Ratio = (Total current Assets-Inventory) / Total current Liabilities b) The currrent ratio decreases between 2012 and 2013. This indicates that the firm's liquidity is deteriorating. Also, the increase in net working capital from 2012 to 2013 indicates a negative cash flow. c) The firm has a low invetory turnover (compared to industry standards). The low inventory turnover could be a result of poor product quality or a poor overall company performance atio have risen each year. During 2015, both current ratio and quick ratio declined. a) The inventory turnover is 6.0, which shows a turnover ratio that is well below the industry average of 10.4. The company needs to find a way to turn their inventory into sales more effectively The textbook suggests any of the following methods: - Reviewing the policies for inventory management and making better policies -Time series analysis can be made to compare the status of inventory and its management -The low ration can also be because of inferior quality goods, overevaluation of closing inventory and stock of obsolete goods. b) The average collection period for Bluegrass foods is 73 days, while the industry average is at 52 days. Since the average time of 72 days is needed to collect accounts receivable, the company takes too long to collect money owed to them. The trade credit management for the company is worse than the industry standard, and the company should do a better job at collecting their accounts receivable. c) The average debt payment period for Bluegrass is 31 days, which is shorter than the industry norm of 40 days. The fact that Bluegrass is able to pay back money owed to others faster than its' competitors is a positive. Bluegrass will be favored when seeking credits, since loaner will trust in them paying back in a timely manner and faster than most of the company's competitors. d) The current ratio of Bluegrass Foods is higher than the industry. This means that the current assets exceed current liabilities in comparison to the industry. This is a positive indicator, yet too little information to conclude on the company's current standing within the industry. below the ventory cies its on of ndustry ct o them. standard, able. ter than oney avored y manner eans that This is a current Fixed payment coverage ratio (3000000) + (200000/1000000) + 200000 +{(800000+1000000} x [1/(1-0.40)]} $ 3,200,000.00 $ 0.76 $ 1,200,000.00 $ 1,800,000.00 $ 1.67 $ 3,000,000.00 Debt ratio=Total L/Total A Total Liabilities=16500000+20000000 $ 36,500,000.00 Debt ratio = 36500000 / 50000000 $ Times interest earned ratio=EBIT/Interest 3000000/1000000 3 0.73 Company C.E. has a high degree of indebtedness, which is indicated by the higher debt ratio value in comparison to the industry average debt ratio. The times interest earned ration and fixed payment coverage ratio are lower in comparison to the industry average, which indicates a greater risk. Hence, the loan request should be rejected. arned ratio=EBIT/Interest igher debt ratio value in tion and fixed payment tes a greater risk. Hence, a) Debt ratio Total L/Total A Pelican Times-interest earned ratio EBIT/interest Pelican 0.1 62.5 a) The debt ratio of Pelican paper Inc. is less than the timberland forest which shows that Pe debt as compared to timberland and Times interest ratio indicates that company has good c to Timberland. b) Operating Profit margin Operating Profits/Sales Pelican 25.0% Net profit margin Earnings available for common Stockholders/Sales 14.8% Return on total assets Earnings available for common Stockholders/Total Assets 36.9% Return on common equity Earnings available for common stockholders/Total common Equity 41.0% c) This shows that the Timberland forest is only making debts when needed, while profiting possible. The fact, that more debt is used shows that the risk is higher, but the dividend in c positive result will also be higher. There is a correlation between risk and return, since the h (Timberland) is also expected to pay higher returns in case of profits. Timberland 0.5 Timberland 12.5 erland forest which shows that Pelican paper is less dependent on ndicates that company has good capacity to pay interest as compare Timberland 25.0% 13.8% 34.5% 69.0% bts when needed, while profiting when sk is higher, but the dividend in case of a ween risk and return, since the higher risk of profits. 1) Current ratio= current Assets/current Liabilities Quick ratio=current A-Inventory/current Liabilties Inventory Turnover=COGS/(Inventory/365) Average collection period=Accounts Receivable/Average sales p. day Debt ratio=Total L/Total A Times interest earned ratio=EBIT/interest Gross profit margin=Gross profit/sales Net profit margin=Earnings available to common stockholders/Sales Return on Total A=Earnings available to common stockholders/Total A Return on common Equity=Earnings Available to common stockholders/Common Stoc Market/book ratio=Market price/book value b) Liquidity is already low and still declining. The activity of the firm is analyzed using the inventory turnover, average collection period a inventory turnover of the firm is lower than industry average, which could indicate usually h The increase of an average collection period indicates ineffective management of receivable The debt of the firm is lower than the industry avarage, however, the lower times interest e the firm's declining ability to pay its interest and debt. The gross profit margin of the firm is less than the industry average, which indicates a high c increase in return on assets and return on equity indicates a positive trend (in sales). The increase in the market/book ratio indicates a positive increase in the market price in com value per share. Overall, company Z. I. has excellent profitability with a deteriorating liquidity. Further investi inventory and accounts receivable is necessary. sales p. day olders/Sales olders/Total A n stockholders/Common Stock Equity 1.04 0.38 2.33 57.03 61.3% 2.79 33.8% 4.1% 4.4% 11.3% 1.29 over, average collection period and asset turnover. The e, which could indicate usually high inventory rates. ective management of receivables. wever, the lower times interest earned ratio indicates average, which indicates a high cost of good sold. The a positive trend (in sales). ncrease in the market price in comparison to the book riorating liquidity. Further investigation of the 2013 2014 2015 1) ROA=Net profit margin x total asset turnover Johnson: 12.45% 12.64% 11.47% Industry: 11.07% 10.01% 8.82% 2) ROE=ROA x FLM Johnson: 21.79% Industry 18.49% 22.13% 16.92% 21.21% 14.46% b) Profitability: Industry net profit margins are decreasing; Johnson’s net profit margins have fallen less. Efficiency: Both industry’s and Johnson’s asset turnover have increased. Leverage: Only Johnson shows an increase in leverage from 2005 to 2006, while the industry has had less stability. Between 2004 and 2005, leverage for the industry increased, while it decreased between 2005 and 2006. As a result of these changes, the ROE has fallen for both Johnson and the industry, but Johnson has experienced a much smaller decline in its ROE. c) Areas where further analysis is required: Areas which require further analysis are profitability and debt. Since the total asset turnover is increasing and is superior to that of the industry, Johnson is generating an appropriate sales level for the given level of assets. But why is the net profit margin falling for both industry and Johnson? Has there been increased competition causing downward pressure on prices? Is the cost of raw materials, labor, or other expenses rising? A common-size income statement could be useful in determining the cause of the falling net profit margin. rofit while the dustry ndustry, otal asset nerating profit mpetition or other rmining CASH RECEIPTS SCHEDULE: March Sales receipts $50,000 Percentages: Cash Sales $10,000 Lag 1 mo. Lag 2 mo. Other income Total cash receipts CASH DISBURSEMENTS SCHEDULE: Disbursements: Purchases Rent Wages & salaries Dividends Principal & Interest Purchase of new equipment Taxes due Total cash disbursements April $60,000 May $70,000 June $80,000 $12,000 $30,000 $14,000 $36,000 $10,000 $2,000 $62,000 $16,000 $42,000 $12,000 $2,000 $72,000 May June $ 50,000 $3,000 $6,000 $70,000 $3,000 $7,000 $3,000 $4,000 $59,000 $6,000 $93,000 CASH BUDGET: May June Total cash receipts Total cash disbursements Net cash flow Add: Beginning cash Ending cash Minimum cash Required total financing $62,000 $59,000 $3,000 $5,000 $8,000 $5,000 $72,000 $93,000 ($21,000) $8,000 ($13,000) $5,000 $18,000 $3,000 $0 Excess cash balance For May: Invest the $3000 excess cash in marketable securities. For June: Liquidate the $3000 of marketab securities and borrow $18000. July: Borrow another 18000 in July to have the required total financing of 3 May the company has access cash,but in June and July it needs to borrow cash, because the ending cash is than the minimum required balance. Nevertheless, the company should prepare a scenario analysis in ord analyze cash flows under a variety of circumstances. July $100,000 $20,000 $48,000 $14,000 $2,000 $84,000 July $80,000 $3,000 $8,000 $6,000 $97,000 July $84,000 $97,000 ($13,000) ($13,000) ($26,000) $5,000 $31,000 $0 Liquidate the $3000 of marketable the required total financing of 31000. In cash, because the ending cash is way less repare a scenario analysis in order to a) Statement showing cash Budget Particulars Monthly take home pay Housing @30% Utilities @5% Food @10% Transportation @7% [email protected]% [email protected]% for Oct and Nov Clothing for Dec Prpoperty [email protected]% for Nov Appliances @1% Personal [email protected]% [email protected]% for Oct and Nov Entertainment for Dec [email protected]% Other 5% Excess Cash 4.5% Remaining Cash b)Yes, there is a deficit in December c) Cumulative surplus is of $657 by end of Dec 2016 October November 4,900.00 4,900.00 1,470.00 1,470.00 245.00 245.00 490.00 490.00 343.00 343.00 24.50 24.50 147.00 147.00 563.50 49.00 49.00 98.00 98.00 294.00 294.00 367.50 367.50 245.00 245.00 220.50 220.50 906.50 343.00 December Total $ 14,700.00 4,900.00 $ 4,410.00 1,470.00 $ 735.00245.00 $ 1,470.00490.00 $ 1,029.00343.00 $ 73.50 24.50 147.00 $ 294.00 $ 440.00440.00 563.50 $ 563.50 $ 147.00 49.00 $ 294.00 98.00 294.00 $ 588.00 $ 1,500.00 1,500.00 $ 1,102.50367.50 $ 735.00245.00 $ 661.50220.50 $ 657.00 (592.50) ...
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