Chapter 04 - CHAPTER4 AnalysisofFinancial Statements...

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    4-1 CHAPTER 4 Analysis of Financial  Statements Ratio Analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors
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    4-2 Balance Sheet: Assets    Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets       2005 7,282   632,160 1,287,360 1,926,802 1,202,950     263,160     939,790 2,866,592       2006E 85,632  878,000 1,716,480 2,680,112 1,197,160     380,120     817,040 3,497,152
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    4-3 Balance sheet:  Liabilities and Equity Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E       2005 524,160   636,808     489,600 1,650,568 723,432 460,000      32,592     492,592 2,866,592       2006E 436,800   300,000     408,000 1,144,800 400,000 1,721,176     231,176 1,952,352 3,497,152
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    4-4 Income statement Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income       2005 6,034,000 5,528,000      519,988     (13,988)       116,960   (130,948)      136,012   (266,960)   (106,784)   (160,176)     2006E 7,035,600   5,875,992     550,000 609,608    116,960 492,648      70,008 422,640     169,056    253,584
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    4-5 Other data No. of shares EPS DPS Stock price Lease pmts 2006E 250,000 $1.014 $0.220 $12.17 $40,000 2005 100,000 -$1.602 $0.110 $2.25 $40,000
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    4-6 Why are ratios useful? Ratios standardize numbers and  facilitate comparisons. Ratios are used to highlight  weaknesses and strengths. Ratio comparisons should be made  through time and with competitors Trend analysis Peer (or Industry) analysis
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    4-7 What are the five major categories of  ratios, and what questions do they  answer? Liquidity: Can we make required payments? Asset management: right amount of assets  vs. sales? Debt management: Right mix of debt and  equity? Profitability: Do sales prices exceed unit  costs, and are sales high enough as  reflected in PM, ROE, and ROA? Market value: Do investors like what they  see as reflected in P/E and M/B ratios?
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    4-8 Calculate D’Leon’s forecasted  current ratio and quick ratio for 2006. Current ratio  = Current assets / Current liabilities = $2,680 / $1,145 = 2.34x Quick ratio  = (CA – Inventories) / CL = ($2,680 – $1,716) / $1,145 = 0.84x
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    4-9 Comments on liquidity ratios 2006E 2005 2004 Ind. Current Ratio 2.34x 1.20x 2.30x 2.70x Quick Ratio 0.84x 0.39x 0.85x 1.00x Expected to improve but still below the  industry average.
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