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lecture 10 - Business Finance Lecture 10 Review of the...

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53 Business Finance Lecture 10 Review of the Previous Lecture Ratio Analysis Short-term solvency, or liquidity, ratios Current ratio Acid Test (Quick) ratio Cash ratio Long-term solvency, or financial leverage, ratios Total Debt ratio Interest Coverage ratio Cash Coverage Ratio Asset management, or turnover, ratios Inventory Turnover & Days’ Sale in Inventory Receivables Turnover & Average Collection Period Payables Turnover Topics under Discussion Ratio Analysis Asset management, or turnover, ratios (Cont.) Total Assets Turnover & Capital Intensity Ratio Profitability ratios Profit Margin Return on Assets Return on Equity Market value ratios Price-Earnings Ratio Market-to-Book Ratio Du Pont Identity A2Z Inc., Balance Sheet A2Z Inc. Balance Sheet as of December 31 ($ in millions) Assets 20X1 20X2 Current Assets Cash $ 84 $ 98 Accounts receivable 165 188 Inventory 393 422 Total $ 642 $708 Fixed assets Net plant and equipment 2,731 2,880 Total assets $3,373 $3,588
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54 A2Z Inc., Balance Sheet Liabilities and equity 20X1 20X2 Current liabilities Accounts payable $ 312 $ 344 Notes payable 231 196 Total $ 543 $ 540 Long-term debt 531 457 Stockholders’ equity Common stock and paid-in surplus 500 550 Retained earnings 1,799 2,041 Total $2,299 $2,591 Total liabilities and equity $3,373 $3,588 A2Z Inc., Income Statement For the year 20X2 ($ in millions) Net sales $2,311 Cost of goods sold 1,344 Depreciation 276 Earnings before interest and taxes $ 691 Interest 141 Taxable income 550 Taxes 187 Net income $ 363 Dividends $121 Retained earnings 242 Total Asset turnover Sales Total Assets Turnover = -------------------- Total Assets $2,311 = ------------ = 0.64 times $3,558 In other words, for every dollar in assets, A2Z generated $0.64 in sales.
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