chap004- finance

chap004- finance - Solutions to Chapter 4 Measuring...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Solutions to Chapter 4 Measuring Corporate Performance 1. a. Long-term debt ratio b. Total debt ratio c. Times interest earned d. Cash coverage ratio e. Current ratio f. Quick ratio g. Operating profit margin h. Inventory turnover i. Days sales in inventory j. Average collection period k. Return on equity 4- 1 l. Return on assets m. Payout ratio 2. Gross investment during the year = Increase in net property, plant, equipment + depreciation = ($19,973 $19,915) + $2,518 = $2,576 3. Market-to-book ratio = $17.2 billion/$9.724 billion = 1.77 Earnings per share = $1,311 million/205 million = $6.40 Price-earnings ratio = $17.2 billion/$1.311 billion = 13.1 4. a. EVA = net income (cost of equity x equity) = 5,642 (.10 x 14,251) = $4,217 EVA fell since the cost of equity is higher. b. Accounting profits are unaffected by changes in the cost of equity. c. Economic Value Added is a better measure of company performance because accounting profits do not include all costs; specifically, the cost of equity capital. 5. a. MVA = market value of shares book value of equity = $97,334 15,368 = $81,966 MVA fell as the market value of the shares dropped 5% b. No, the expected return on all shares has risen. c. Yes, the cost of equity capital has increased for Pepsi. 6. a. Sustainable growth = (1 payout ratio) x ROE = (1 0.57) x 0.396 = 0.1703, or 17.03% Pepsis sustainable growth rate will fall with the lower plowback ratio. b. Sustainable growth = = (1 0.67) x 0.095 = 0.0637, or 6.37% The sustainable growth will fall below its cost of equity due to the payout of earnings. 4- 2 7. Asset turnover Operating profit margin Asset turnover Operating profit margin = 0.4779 0.1513 = 0.0723 = ROA 8. a. ROE b. (Notice that we have used average assets and average equity in this solution.) 9. a. The consulting firm has relatively few assets. The major asset is the know- how of its employees. The consulting firm has the higher asset turnover ratio. b. The Catalog Shopping Network generates far more sales relative to assets since it does not have to sell goods from stores with high expenses and probably can maintain relatively lower inventories. The Catalog Shopping Network has the higher asset turnover ratio. c. The supermarket has a far higher ratio of sales to assets. The supermarket itself is a simple building and the store sells a high volume of goods with relatively low mark-ups (profit margins). Standard Supermarkets has the higher asset turnover. 4- 3 10. ROE = net income / equity, or net income = ROE x equity EVA = net income (cost of equity x equity), substituting EVA = (ROE x equity) (cost of equity x equity), or EVA = equity x (ROE - cost of equity) Thus, EVA is positive if ROE exceeds the cost of equity 11. a. Debt-equity ratio b. Return on equity c. Profit margin d. Inventory turnover e. Current ratio f. Average collection period g. Quick ratio 12. If Pepsi borrows $300 million and invests the funds in marketable securities, both...
View Full Document

Page1 / 14

chap004- finance - Solutions to Chapter 4 Measuring...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online