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Ch17_5th - Solutions to Chapter 17 Financial Statement...

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Solutions to Chapter 17 Financial Statement Analysis 1. [Note: On page 477 in the text, End of Year Total current assets in the Balance Sheet at the bottom of the page should be 4,336 rather than the figure in the text which is 4,366.] a.Long-term debt ratio 42 . 0 960 , 11 632 , 8 632 , 8 = + = b. Total debt ratio 65 . 0 088 , 34 599 , 7 632 , 8 897 , 5 = + + = c.Times interest earned 74 . 3 843 156 , 3 = = d. Cash coverage ratio 42 . 7 843 097 , 3 156 , 3 = + = e.Current ratio 74 . 0 897 , 5 336 , 4 = = f. Quick ratio 52 . 0 897 , 5 930 , 2 109 = + = g. Operating profit margin % 1 . 15 151 . 0 277 , 16 843 612 , 1 = = + = h. Inventory turnover 06 . 19 2 / ) 293 231 ( 994 , 4 = + = i. Days sales in inventory days 15 . 19 365 / 994 , 4 2 / ) 293 231 ( = + = j. Average collection period days 19 . 67 365 / 277 , 16 2 / ) 063 , 3 930 , 2 ( = + = k. Return on equity % 9 . 13 139 . 0 2 / ) 218 , 11 960 , 11 ( 612 , 1 = = + = 17-1
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l. Return on assets % 2 . 7 072 . 0 2 / ) 828 , 33 088 , 34 ( 843 612 , 1 = = + + = m. Payout ratio 73 . 0 612 , 1 175 , 1 = = 2. Gross investment during the year = Increase in net property, plant, equipment + depreciation = (€24,567 – €24,495) + €3,097 = €3,169 3. Earnings per share = €1,612 million/195 million = €8.27 Price-earnings ratio = €22.3 billion/€1.612 billion = 13.8 4. a.ROE % 91 . 13 1391 . 0 589 , 11 612 , 1 2 / ) 218 , 11 960 , 11 ( 612 , 1 = = = + = b. = + × + × × nterest i income Net income Net Sales nterest i income Net Assets Sales Equity Assets % 91 . 13 1391 . 0 843 612 , 1 612 , 1 277 , 16 843 612 , 1 958 , 33 277 , 16 589 , 11 958 , 33 = = + × + × × (Notice that we have used average assets and average equity in this solution.) 5. ROA % 23 . 7 0723 . 0 958 , 33 843 612 , 1 assets total Average interest income Net = = + = + = Asset turnover % 93 . 47 4793 . 0 958 , 33 277 , 16 assets total Average Sales = = = = Operating profit margin % 08 . 15 1508 . 0 277 , 16 843 612 , 1 Sales interest income Net = = + = + = Asset turnover × Operating profit margin = 0.4793 × 0.1508 = 0.0723 = ROA 17-2
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6. Balance sheets for MedPhone Corp: Dollar amounts Common-size (% amounts) End of year Start of year End of year Start of year Assets Cash & marketable securities 109 194 0.32% 0.57% Receivables 2,930 3,063 8.60% 9.05% Inventories 231 293 0.68% 0.87% Other current assets 1,066 1,146 3.13% 3.39% Total current assets 4,336 4,696 12.72% 13.88% Net property, plant, and equipment 24,567 24,495 72.07% 72.41% Other long-term assets 5,185 4,637 15.21% 13.71% Total assets €34,088 €33,828 100.00% 100.00% Liabilities and Shareholder’s Equity Payables € 3,154 € 3,739 9.25% 11.05% Short-term debt 1,745 1,935 5.12% 5.72% Other current liabilities 998 968 2.93% 2.86% Total current liabilities 5,897 6,642 17.30% 19.63% Long-term debt and leases 8,632 8,405 25.32% 24.85% Other long-term liabilities 7,599 7,563 22.29% 22.36% Shareholders’ equity 11,960 11,218 35.09% 33.16% Total Liabilities & Shareholders’ equity €34,088 €33,828 100.00% 100.00% 7. Leverage ratios measure the extent to which the firm uses debt as a source of financing, as opposed to equity financing. The term “leverage” is used because the use of debt magnifies (or ‘leverages’) the firm’s profits, from the shareholders’ point of view. Since interest payments to debtholders are typically fixed, then any increase in profitability accrues to the shareholders; similarly, decreases in profitability are leveraged, from the shareholders’ viewpoint, because fixed payments must be made to debtholders. Examples of leverage ratios are: Long-term debt ratio equity debt term - long debt term - long + = Long-term debt-equity ratio equity debt term - long = Total debt ratio assets total s liabilitie total = Times interest earned payments interest EBIT = 17-3
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Liquidity ratios measure the firm’s ability to meet its short-term obligations. The
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