fm4 11 - a low M/B ratio. The company needs to do something...

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Answers and Solutions: 4 - 11 4-14 a. Here are the firm’s base case ratios and other data as compared to the industry: Firm Industry Comment Quick 0.8 × 1.0 × Weak Current 2.3 2.7 Weak Inventory turnover 4.8 7.0 Poor Days sales outstanding 37 days 32 days Poor Fixed assets turnover 10.0 × 13.0 × Poor Total assets turnover 2.3 2.6 Poor Return on assets 5.9% 9.1% Bad Return on equity 13.1 18.2 Bad Debt ratio 54.8 50.0 High Profit margin on sales 2.5 3.5 Bad EPS $4.71 n.a. -- Stock Price $23.57 n.a. -- P/E ratio 5.0 × 6.0 × Poor P/CF ratio 2.0 × 3.5 × Poor M/B ratio 0.65 n.a. -- The firm appears to be badly managed--all of its ratios are worse than the industry averages, and the result is low earnings, a low P/E, P/CF ratio, a low stock price, and
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Unformatted text preview: a low M/B ratio. The company needs to do something to improve. b. A decrease in the inventory level would improve the inventory turnover, total assets turnover, and ROA, all of which are too low. It would have some impact on the current ratio, but it is difficult to say precisely how that ratio would be affected. If the lower inventory level allowed the company to reduce its current liabilities, then the current ratio would improve. The lower cost of goods sold would improve all of the profitability ratios and, if dividends were not increased, would lower the debt ratio through increased retained earnings. All of this should lead to a higher market/book ratio and a higher 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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