FIN 3403 Solutions for Exam 1 Practice Problems (1)

FIN 3403 Solutions for Exam 1 Practice Problems (1) - FIN...

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FIN 3403 Solutions for Exam1 Practice Problems Ratio Analysis Problems 1 XYZ’s profit margin in 2009 = 6.33% but it was 9.87% in 2008 so they get to keep less of each sale they make than they did the previous year. They are less profitable in 2009 than 2008. 2 To see how effectively the manager is utilizing assets we can use a turnover measure. Total asset turnover is 1.331 in 2009 but was 2.093 in 2008. This means they are using their total assets less efficiently to generate sales than they did during the previous year. You can look at other turnover ratios like accounts receivables turnover which is about 11.23 for 2009 and 19.32 in 2008. In this case the firm is taking longer to collect its accounts receivables than it did in 2008 which is typically a bad thing. Inventory turnover is 15.74 in 2009 and 24.48 in 2008. Since inventory turnover was higher in 2008 than it was in 2009 the company’s inventory was moving off the shelves quicker in 2008 so in 2009 they’re worse off since their inventory is staying in the warehouse longer. NWC Turnover in 2009 is about 97.85 in 2009 and 20.61 in 2008 so the firm is using its excess short term assets (i.e. current assets left over after paying current liabilities) more efficiently to generate sales in 2009 than it did in 2008. 3 The percentage of the firm financed with debt is the total debt ratio which is .5054 in 2009 and .4847 in 2008. So over the year they have borrowed some money (levered up). All the other measures will tell you the same thing. The D/E ratio for 2009 is 1.022 while it was .94 in 2008. This means that now the firm has $1.02 of debt for every dollar of equity but last year they only had $.94 of debt for each dollar of equity. The Equity multiplier is 2.022 in 2009 and 1.94 in 2008. Thus you can see the leverage. A stockholder that has invested $1 in the company controls $2.02 of assets in 2009 while in 2008 the same $1 investment controlled $1.94 in assets. 4 To see if the firm can meet its interest expense we can use the TIE Ratio or the cash coverage ratio. In this case the TIE ratio is 64.46 in 2009 and 124.92 in 2008. While cash coverage ratio is 86.21 in 2009 and 143.31 in 2008. In either case the firm’s ability to pay its debts has decreased over the past year but they still are not in danger of not being able to pay the interest expense since their EBIT covers their interest expense more than 64 times.
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5 The Earnings per share (EPS) is $2.45 per share in 2009. 6 The P/E ratio for XYZ in 2009 is $27.83 which means investors are willing to pay $27.83 for $1 of current earnings. People must see some growth potential for the firm’s earnings. Recall that most large firms in the US have P/E’s between 15-20 so this firm might be expected to have a higher growth potential than the large firms. The industry average P/E ratio is 12.5 which means that investors are willing to pay more than double for $1 of XYZ’s current earnings than for $1 of their competitors earnings. Again this indicates that XYZ’s growth prospects are perceived to be better by investors.
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FIN 3403 Solutions for Exam 1 Practice Problems (1) - FIN...

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