2014 session 5
Post on 03-Oct-2015
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Income Statement
20072008ESales7,035,600COGS4,980,000 5,800,000Other expenses720,000 612,960Deprec.116,960 120,000 Tot. op. costs5,816,960 6,532,960 EBIT17,440 502,640Int. expense176,000 80,000 EBT(158,560)422,640Taxes (40%)(63,424)169,056Net income(95,136)253,584
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Balance Sheets: Assets
20072008ECash7,282 14,000S-T invest.20,000 71,632AR632,160 878,000Inventories1,287,360 1,716,480 Total CA1,946,802 2,680,112 Net FA939,790 836,840Total assets2,886,592 3,516,952
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Balance Sheets: Liabilities & Equity
20072008EAccts. payable324,000 359,800Notes payable720,000 300,000Accruals284,960 380,000 Total CL1,328,960 1,039,800Long-term debt1,000,000 500,000Common stock460,000 1,680,936Ret. earnings97,632 296,216 Total equity557,632 1,977,152Total L&E2,886,592 3,516,952
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Other Data
20072008EStock price$6.00$12.17# of shares100,000 250,000EPS-$0.95$1.01DPS$0.11$0.22Book val. per share$5.58$7.91Lease payments$40,000$40,000Tax rate0.40.4
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Why are ratios useful?Standardize numbers; facilitate comparisonsUsed to highlight weaknesses and strengths
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Five Major Categories of RatiosLiquidity: Can we make required payments as they fall due?Asset management: Do we have the right amount of assets for the level of sales?
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Ratio Categories (Continued)Debt management: Do we have the right mix of debt and equity?Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?Market value: Do investors like what they see as reflected in P/E and M/B ratios?
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Forecasted Current and Quick Ratios for 2008.
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Forecasted Current and Quick Ratios for 2008.
CA26,80,112CL10,39,800Current Ratio2.577526
CA - Inventory9,63,632CL10,39,800Quick Ratio0.926747
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Comments on CR and QRExpected to improve but still below the industry average.Liquidity position is weak.
2008E20072006Ind.CR2.58x1.46x2.3x2.7xQR0.93x0.5x0.8x1.0x
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Inventory Turnover Ratio vs. Industry Average
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Inventory Turnover Ratio vs. Industry Average
COGS58,00,000Inventory17,16,480COGS/Inventory3.379008
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Comments on Inventory TurnoverInventory turnover is below industry average.Firm might have old inventory, or its control might be poor.No improvement is currently forecasted.
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DSO: average number of days from sale until cash received.
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DSO: average number of days from sale until cash received.
AR8,78,000Sales70,35,600Sales/day19275.62DSO45.54978
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Appraisal of DSOFirm collects too slowly, and situation is getting worse.Poor credit policy.
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Fixed Assets and Total AssetsTurnover Ratios
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Fixed Assets and Total AssetsTurnover Ratios
Sales70,35,600Assets35,16,952Fixed Assets8,36,840Asset turnover2.000482Fixed Assets turnover8.407342
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Fixed Assets and Total AssetsTurnover RatiosFA turnover is expected to exceed industry average. Good.TA turnover not up to industry average. Caused by excessive current assets (A/R and inventory).
2008E20072006Ind.FA TO8.4x6.2x10.0x7.0xTA TO2.0x2.0x2.3x2.5x
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Calculate the debt, TIE, and EBITDA coverage ratios.
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Calculate the debt, TIE, and EBITDA coverage ratios.
Total LiabilitiesCL10,39,800LT Debt5,00,00015,39,800Total Assets35,16,952TL/TA0.437822
Interest80,000EBIT5,02,640TIE6.283
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EBITDA Coverage (EC)
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EBITDA Coverage (EC)
EBITDAEBIT5,02,640Depreciation1,20,0006,22,640Interest80,000Debt Repayment0EC7.783
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Debt Management Ratios vs. Industry AveragesRecapitalization improved situation,
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Profit Margin (PM)Very bad in 2007, but projected to meet industry average in 2008. Looking good.
Net Income2,53,584Sales70,35,600Profitability0.036043
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Basic Earning Power (BEP)
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Basic Earning Power vs. Industry AverageBEP removes effect of taxes and financial leverage. Useful for comparison.Projected to be below average.Room for improvement.
EBIT5,02,640Total Assets35,16,952BEP0.142919
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Return on Assets (ROA)and Return on Equity (ROE)
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Return on Assets (ROA)and Return on Equity (ROE)
Net income2,53,584Total Assets35,16,952ROA0.072103
Net Income2,53,584Equity19,77,152ROE0.128257
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ROA and ROE vs. Industry AveragesBoth below average but improving.
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Effects of Debt on ROA and ROEROA is lowered by debt--interest expense lowers net income, which also lowers ROA.However, the use of debt lowers equity, and if equity is lowered more than net income, ROE would increase.
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Explain the Du Pont SystemThe Du Pont system focuses on:Expense control (PM)Asset utilization (TATO)Debt utilization (EM)It shows how these factors combine to determine the ROE.
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The Du Pont System
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The Du Pont System2006:2.6% x 2.3x2.2=13.2%2007:-1.6%x2.0x5.2=-16.6%2008:3.6%x2.0x1.8=13.0%Ind.:3.6%x2.5x2.0=18.0%
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Potential Problems and Limitations of Ratio Analysis?Comparison with industry averages is difficult if the firm operates many different divisions.Average performance is not necessarily good.Seasonal factors can distort ratios.
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Problems and Limitations (Continued)Different accounting and operating practices can distort comparisons.Sometimes it is difficult to tell if a ratio value is good or bad.
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Qualitative FactorsAre the companys revenues tied to a single customer?To what extent are the companys revenues tied to a single product?To what extent does the company rely on a single supplier?(More)
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Qualitative Factors (Continued)What percentage of the companys business is generated overseas?What is the competitive situation?What does the future have in store?What is the companys legal and regulatory environment?
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