New Chapter 4 Class Notes

New Chapter 4 Class - ratio – less risk to them Stockholders may want a higher debt ratio – more debt to gain more leverage B Times Interest

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Chapter 4: Analysis of Financial Statements I. Liquidity Ratios Use 2002 statements for Allied Food Products for all ratio examples. A. Current Ratio = CA / CL = 1,000 / 310 = 3.2 times B. Quick Ratio = CA – Inv. / CL = 1,000 – 615 / 310 = 1.2 times II. Asset Management Ratios A. Inventory Turnover = Sales / Inv. = 3,000 / 615 = 4.9 times B. Days Sales Outstanding (DSO) = A/R / Sales/365 = 375 / 3,000/365 = 45.6 days Represents average length of time the firm must wait to receive cash after making a sale. If DSO is trending higher, may want to review credit policy. C. Fixed Assets Turnover = Sales / Net Fixed Assets = 3,000 / 1,000 = 3.0 times Need to be careful when comparing to a much newer firm whose net assets are listed at much closer to actual market value. D. Total Asset Turnover = Sales / Total Assets = 3,000 / 2,000 = 1.5 times III. Debt Management Ratios A. Debt Ratio = Total debt / Total assets = 1,064 / 2,000 = .532 = 53.2% Creditors supplied 53.2% of total financing. Future creditors prefer to see a low debt
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Unformatted text preview: ratio – less risk to them. Stockholders may want a higher debt ratio – more debt to gain more leverage. B. Times Interest Earned (TIE) = EBIT / Interest = 283.8 / 88 = 3.2 times IV. Profitability Ratios A. Profit Margin = NI / Sales = 117.5 / 3,000 = 3.9% B. Return on Total Assets = NI / TA = 117.5 / 2,000 = 5.9% C. Return on Common Equity (ROE) = NI / Common Equity = 117.5 / 940 = 12.5% V. Market Value Ratios A. Price Earnings Ratio (P/E) = price per share / earnings per share = 23.00 / 2.27 = 10.1 times P/E tends to be higher for firms with strong prospects for growth and lower for firms considered to be riskier to investors. B. Market to Book Ratio (M/B) = market price per share / book value per share = 23.00 / 18.80 = 1.2 times Book value per share = Common Equity / # shares o/s = 940 / 50 = 18.80 VI. Equity Multiplier = TA / Common Equity = 2,000 / 940 = 2.13 Higher the firm’s debt, the higher the equity multiplier....
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This note was uploaded on 03/24/2008 for the course BUS 320 taught by Professor Sloan during the Fall '08 term at N.C. State.

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New Chapter 4 Class - ratio – less risk to them Stockholders may want a higher debt ratio – more debt to gain more leverage B Times Interest

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