ACC 230 WEEK 8 CHECKPOINT 1 - ANALYZING FINANCIAL DATA

ACC 230 WEEK 8 CHECKPOINT 1 - ANALYZING FINANCIAL DATA -...

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Week 7 CheckPoint 1: Analyzing Financial Data · Resource: Ch. 6 of Understanding Financial Statements · Due Date: Day 2 [Individual forum] · Complete Problem 6.6 on p. 232 (Ch. 6). Submit your answers to questions (a) and (b).
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Ans. A Current Equity Debt Sales 100,000,000 Cost of Sales 65,000,000 Gross Profit 35,000,000 Less: Operating expenses 20,000,000 Operating Profit ( f ) 15,000,000 18,000,000 18,000,000 Interest expense ( e ) 4,800,000 4,800,000 6,300,000 Earnings before tax 10,200,000 13,200,000 11,700,000 Income tax @40% 4,080,000 5,280,000 4,680,000 Net income ( d ) 6,120,000 7,920,000 7,020,000 Value of debt ( a ) 40,000,000 40,000,000 50,000,000 Value Of Equity ( b ) 50,000,000 60,000,000 50,000,000 Number of shares ( c) 800,000 1,000,000 800,000 EPS ( d/c) 7.650 7.920 8.775 Debt ratio [ a/(a+b)*100] 44% 40% 50% Times interest earned ( f/e ) 3 4 3 Financial leverage ( f/f-e ) 1.471 1.364 1.538   Ans. B The company should consider the following points when taking such a decision. The return that the ordinary shareholders are expecting on the shares that they hold.
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Unformatted text preview: • Any expected growth in dividends that the shareholders expect from the company's shares. • Any minimum EPS or P/E ratios that the company may have to maintain according to market expectations, in order to maintain its share marketability. • The potential loss in share price and the accompanying loss of goodwill, incase the said policy goes wrong. • The availability of debt from the market. • The duration for which the long-term loan is sought. Ideally, it should match the length of time of the project. • Whether the loan to be obtained contains a clause for the bank to reconsider interest rates, in the future, should it wish to do so. • The amount of security or any such restrictive covenants (minimum cash, specific EPS maintenance) that come with the loan....
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ACC 230 WEEK 8 CHECKPOINT 1 - ANALYZING FINANCIAL DATA -...

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