Ch05 - CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION BRIEF EXERCISE BE51 Coke Pepsi(a ROE = Net Income/Average Stockholders Equity 33.6 33.3 ROA

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION BRIEF EXERCISE BE5–1 Coke Pepsi (a) ROE = Net Income/Average Stockholders Equity 33.6% 33.3% ROA = (Net Income +[Interest Expense (1-Tax Rate)])/ Average Total Assets 17.3% 15.1% Common Equity Leverage = Net Income/(Net Income + [Interest Expense(1-Tax Rate)]) 96.9% 96.9% Capital Structure Leverage = Average Total Assets/ Average Stockholders Equity 2.00 2.28 Return on Sales = Net Income + [Interest Expense (1- Tax Rate)]/Net Sales 21.3% 13.7% Asset Turnover = Sales/Average Total Assets .81 1.11 Coke and Pepsi return similar percentages on equity, but Coke is slightly better at generating a return from assets. Leverage is similar with Pepsi showing higher relative debt levels, according to the Capital Structure Leverage ratio. Coke shows a large advantage on its margin on converting sales into profits, but Pepsi generates more sales from each dollar of assets. (b) ROA x Common Equity Leverage x Capital Structure Leverage = ROE Coke: .173 x ..969 x 2.00 = .335 (rounding) Pepsi: .151 x .969 x 2.28 = .334 (rounding) (c) Profit Margin x Asset Turnover = ROA Coke: .213 x .81 = .173 Pepsi: .137 x 1.11 = .152 (rounding) (d) Coke has only a slight edge in ROE, but its ROA is over two points higher than that of Pepsi. The advantage in ROA is driven by the much higher profit margin (21.3% versus 13.7%) of Coke. Coke is better at converting sales into profits. EXERCISES E5–1 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Profitability Ratios: Return on Equity = Net Income ÷ Average Stockholders’ Equity 2002: $1,893 ÷ 27,888 = .068 2003: $3,578 ÷ 28,342.5 = .126 Return on Sales = (Net Income + [Interest Expense (1 – Tax Rate)]) ÷ Net Sales 2002: ($1,893 + [0 x (1 - .29)]) ÷ $18,915 = .100 2003: ($3,578 + [0 x (1 - .29)]) ÷ $18,878 = .190 Solvency Ratios: Current Ratio = Current Assets ÷ Current Liabilities 2002: $ 17,433 ÷ $ 8,375 = 2.08 2003: $ 13,415 ÷ $ 8,294 = 1.62 Leverage Ratios: Capital Structure Leverage Ratio = Average Total Assets ÷ Average Total Stockholders’ Equity 2002: $36,516.5 ÷ $27,888 = 1.31 2003: $37,451 ÷ $28,342.5 = 1.32 Overall, by examining the above computed ratios, it appears that Cisco would be a good investment. Profitability increased substantially from 2002 to 2003, while leverage remained constant. The only ratio that would be somewhat negative is the decrease in solvency, but the current ratio is still adequate. 2
Background image of page 2
E5–2 Profitability Ratios: Return on Equity = Net Income ÷ Average Stockholders’ Equity 2002: $3,117 ÷ 35,649 = .087 2003: $5,641 ÷ 36,657 = .154 Return on Sales = (Net Income + [Interest Expense (1 – Tax Rate)]) ÷ Net Sales 2002: ($3,117 + [194 x (1 - .24)]) ÷ $26,764 = .122 2003: ($5,641 + [192 x (1 - .24)]) ÷ $30,141 = .192 Solvency Ratios: Current Ratio = Current Assets ÷ Current Liabilities 2002: $18,925 ÷ $6,595 = 2.87 2003: $22,882 ÷ $6,879 = 3.33 Leverage Ratios: Capital Structure Leverage Ratio = Average Total Assets ÷ Average Total Stockholders’ Equity 2002: $44,309.5
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/25/2009 for the course FIN FIN504 taught by Professor Byungjinkwak during the Spring '09 term at Korea Advanced Institute of Science and Technology.

Page1 / 44

Ch05 - CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION BRIEF EXERCISE BE51 Coke Pepsi(a ROE = Net Income/Average Stockholders Equity 33.6 33.3 ROA

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online