Chapter 8 - Teacher's notes

Chapter 8 - Teacher's notes - To determine why return on...

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Limited capital requires selecting the best alternative investment. Investor have choices. If your company does not have the best investment than they will choose other investments. Ex. Southern First vs Bank America. American Federal compared to KBW reinvestment. Return on investment needs to consider related risk. Wachovia Bank example. If management does not provide their investors with an acceptable return then new management will be selected. Two key measurements: Return on equity Return on assets. Return on operating assets Return on nonoperating assets (How much of a drag?) Improve return on equity by increasing leverage. If cost of borrowing is less than return on equity, leverage is effective. All ratios are only relative in comparison to other alternatives. (Company comparisions.)
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Unformatted text preview: To determine why return on equity is lower than desired, we need to evaluate the various components that feed to net income. Or determine that we have too much capital. If you can not effectively utilize the capital then you need to return the capital. Stock dividends. Net income is a function of two issues. Net margin Asset turn over Measure net margin as a percentage of sales. Measure turnover as a utilization of assets. Management most decide what operating plan to utilize: Low margin higher sales Higher margin lower sales Higher selling expense or less expense? Inventory levels and related costs Accounts receivable terms may increase sales. Higher accounts payable or longer terms reduce financing expenses....
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Chapter 8 - Teacher's notes - To determine why return on...

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