MGMT310_lecture4_5

MGMT310_lecture4_5 - Lectures 4 & 5 Lectures 4 & 5...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
ctures 4 & 5 Announcement : I’ve posted some of the problems from Lecture 3 as practice Lectures 4 & 5 problems on katalyst (with solutions) Last time we discussed…. How can we make informative comparisons? ommon financial ratios (table 3.8, page 65) Common financial ratios (table 3.8, page 65) I. Short term solvency / liquidity ratios II. Long term solvency / financial leverage ratios III. Asset management / turnover ratios IV. Profitability ratios V. Market value ratios
Background image of page 1

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

View Full DocumentRight Arrow Icon
The Du Pont identity How does leverage transform return on assets into return on equity? ROA ROE = NI/Sales × Sales / Assets × Assets / TotalEquity (Profit Margin) (Asset Turnover) (Equity Multiplier) Thus, ROE has three parts: Operating efficiency sset Use efficiency Similarly, ROA has two parts: Operating efficiency sset Use efficiency Asset Use efficiency Financial leverage Asset Use efficiency
Background image of page 2
Problem 3.8 Braam Fire Prevention Corp. has a profit margin of 6.80 percent, total asset turnover of 1.95, and ROE of 18.27 percent. What is the firm’s debt equity ratio?
Background image of page 3

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

View Full DocumentRight Arrow Icon
Some problems with financial statement analysis… No underlying theory to suggest which ratios are important and what the relevant benchmarks should be. Finding peer groups for large conglomerates is difficult. Comparing domestic firms with international competitors is complicated. ifferences in se of managerial discretion Differences in use of managerial discretion
Background image of page 4
Earnings management to exceed thresholds Degeorge, Patel, and Zeckhauser ( Journal of Business , 1999)
Background image of page 5

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

View Full DocumentRight Arrow Icon
Google snapshot on 1/18/2012 08/19/2004: Google stock opened at $100.00 2/31/2004 Gl tk ld t $192 79 ith P/E ti 93 135 12/31/2004: Google stock closed at $192.79, with P/E ratio 93.135
Background image of page 6
Sample financial statements Publicly traded firms must file with the SEC and make their financial statements publicly available http://www.sec.gov/edgar/searchedgar/companysearch.html 10 K –prov ides annual snapshots E.g., Starbucks’ Form 10 K: http://www.sec.gov/Archives/edgar/data/829224/000095012309064772/v53316e10vk. htm 10 Q – provides quarterly snapshots E.g., Starbucks’ Form 10 Q: http://www.sec.gov/Archives/edgar/data/829224/000095012309029843/v52638e10vq. htm
Background image of page 7

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

View Full DocumentRight Arrow Icon
Financial planning Firm A is a restaurant chain in Indiana. It would like to expand to Illinois within the next five years. Some things Firm A needs to consider: 1. How much capital is needed for investment in new assets? 2. How should this expansion be financed (i.e., cash/debt/equity)? 3. How will this expansion affect net working capital needs? 4. What kind of sales/profit growth is expected? 5. How much is Firm A currently paying out in dividends, and how ould this change in accordance with Firm A’s growth? should this change in accordance with FirmAs growth? 6. Is this expansion feasible, taking into account Firm A’s other goals/constraints? (e.g., debt capacity, dividend policy, etc.)
Background image of page 8
Let’s do a simple example together Recent (Actual) Financial Statements: come statement alance sheet Income statement Balance sheet Sales $1,000 Assets $500 Debt $200 Costs 900 Equity 300 EBIT 100 Total $500 $500 Interest 0 Taxable Income 100
Background image of page 9

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

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/27/2012 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue.

Page1 / 29

MGMT310_lecture4_5 - Lectures 4 & 5 Lectures 4 & 5...

This preview shows document pages 1 - 10. Sign up to view the full document.

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