w07 3Afinal key

w07 3Afinal key - Econ 3A Financial Accounting W'07 Exam...

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3A-W’07-Final Exam – Key p1 Econ 3A– Financial Accounting – W’07 Exam # 3 (Final) 100 points ANSWER KEY Show all your work. Clearly label all answers. PROBLEM 1 – FINANCIAL STATEMENT ANALYSIS (60 points) Use the financial statements of FedEx for all parts of this problem. Use year-end numbers where a formula calls for an average. a. Liquidity. Compute FedEx’s accounts receivable collection period for 2006 and 2005. How well is FedEx managing its accounts receivable? b. Solvency. Compute FedEx’s debt to total assets and interest coverage ratios for 2006 and 2005. Evaluate FedEx’s equity cushion and its ability to make interest payments. c. Profitability. Compute FedEx’s asset turnover, profit margin ratio, and return on assets for 2006 and 2005. Comment on the trends in each. d. Market ratios. FedEx’s year-end stock prices were $108.62 (2006) and $103.39 (2005). Compute FedEx’s price-earnings ratio and dividend yield for 2006 and 2005. What does the trend in the P-E ratio suggest about the market’s perception of FedEx’s future earnings growth? Would you recommend FedEx’s stock to an investor seeking current income from dividends? e. Cash flows and the product life cycle. Compute FedEx’s free cash flow for 2006 and 2005. Use those amounts and other information from cash flow statement to determine in what phase of the product life cycle is FedEx. Explain. f. What other major company would you use for comparative purposes to evaluate FedEx’s ratios? (Hint: NOT General Mills.) (Additional hint: “What can brown do for you?”) See Excel worksheet for ratios required in (a) – (e). Explanations, interpretations, etc. Each 6 point item: 4 for the ratio computations and 2 for the related explanation . a. FedEx’s collection period is only 40-41 days and remained steady over the two years. 6 b. FedEx has an equity cushion of around 50% in both years (complement of the debt-to-equity ratio) 6 and a strong and improving interest coverage ratio (miles above the danger zone of 2 to 1). 6 c. Asset turnover 6 was steady and profit margin increased 6 , leading to an
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