fm4 10 - While the company’s profit margin is higher than...

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Answers and Solutions: 4 - 10 b. For the firm, ROE = PM × T.A. turnover × EM = 1.7% × 1.7 × $361,000 $947,500 = 7.6%. For the industry, ROE = 1.2% × 3 × 2.5 = 9%. Note : To find the industry ratio of assets to common equity, recognize that 1 - (total debt/total assets) = common equity/total assets. So, common equity/total assets = 40%, and 1/0.40 = 2.5 = total assets/common equity. c. The firm’s days sales outstanding is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both.
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Unformatted text preview: While the company’s profit margin is higher than the industry average, its other profitability ratios are low compared to the industry--net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. d. If 2007 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2006 ratios will be misled, and a return to normal conditions in 2008 could hurt the firm’s stock price....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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