530Mod2b

Session 3 - Analysis of Financial Statements, Chapter 3

All page numbers are references to Corporate Finance: A Focused Approach 7th edition by Ehrhardt and Brigham (Cengage South-Western, 2020)

Things to Absorb

Purpose of financial statement analysis, common size analysis versus ratio analysis, trend/historical analysis versus benchmarking/competitive analysis, focus on calculating and interpreting ratios, also on ratio algebra (i.e., how changes in financial statements affects ratios), and limitations of ratio analysis.

Do not need to absorb - Dupont equation and how to use or interpret Dupont equation (Note, many people find the Dupont discussion useful in understanding ratio algebra) and qualitative factors in section 3-11.

Things to Read

Read Chapter 3.

Things to Do

Make 100 on the quiz. I do not list suggested questions and problems below. This is because many of the questions are comprehensive rather than focused. But, after studying this chapter, you should be able to solve all of the end of chapter questions and problems, and self-test review questions. However, rather than spending time completing those questions, I suggest you focus on the Chapter Quiz. Almost all of the end of chapter questions and problems are in my quiz database.  On our D2L course page, under Chapter 3 Content, I have placed a ToolKit.  These are Excel spreadsheet solutions to various end of chapter problems and Excel templates for common Financial Statement Analysis Problems.

  1. Watch the Chapter Introduction and Overview video. The Powerpoints for all of this chapter's videos are located here. The minicase follows a different order than the chapter, so the reading is not consecutive.
  2. Read pages 101-104, 108-112).
  3. Watch the videos on Liquidity Ratios and Asset Management Ratios (minicase page 135 letters a-c).
  4. Read pages 104-108, 113-120.
  5. Watch the videos on Leverage Ratios, Profitability Ratios, and Market Ratios (minicase d-f).
  6. Read the rest of the chapter.
  7. Watch the videos on Common Size Analysis, Dupont Equation and Limitations of Ratio Analysis (minicase g-j).
  8. Here are audio solutions, created by Dr. Ronald Best, to several types of ratio problems:
    1. TCBW last year had an average collection period (days sales outstanding) of 35 days based on accounts receivable of $460,000. All of the firm's sales are made on credit. The firm expects sales this year to be the same as last year. However, the company has begun a new credit policy that should lower the average collection period to 28 days. If the new average collection period is attained, what will the firm's accounts receivable balance equal? | Audio Solution
    2. The RRR Company has a target current ratio of 3.2. Presently, the current ratio is 4.4 based on current assets of $6,556,000. If RRR expands its inventory using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached? | Audio Solution
    3. AAA's inventory turnover ratio is 22.30 based on sales of $25,200,000. The firm's current ratio equals 10.21 with current liabilities equal to $290,000. If the firm's cash and marketable securities equal $732,342, what is the firm's days sales outstanding? | Audio Solution
    4. U KNO, Inc. uses only debt and common equity funds to finance its assets. This past year the firm's return on total assets was 19%. The firm financed 39% percent of its assets using equity. What was the firm's return on common equity? | Audio Solution
    5. Last year YYY Company had a 5.00% net profit margin based on $21,000,000 in sales and $14,000,000 of total assets. During the coming year, the president has set a goal of attaining a 8% return on total assets. If YYY finances 56% of its assets by borrowing, what will its return on common equity be next year if the return on assets goal is achieved? | Audio Solution
    6. The RRR Company has a target current ratio of 3.6. Presently, the current ratio is 4.5 based on current assets of $8,505,000. If RRR expands its fixed assets using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached? | Audio Solution
    7. AAA's inventory turnover ratio is 22.30 based on sales of $25,200,000. The firm's current ratio equals 10.21 with current liabilities equal to $290,000. What is the firm's quick ratio? | Audio Solution
    8. Use the information below to calculate the firm's return on common equity. (State your answer as a percentage with two decimal places.) Net profit margin = 11.88%; Debt ratio = 44.29%; Fixed asset turnover = 7.54; Total asset turnover = 3.50 ; Inventory turnover = 22.3. | Audio Solution
    9. U KNO, Inc. uses only debt and common equity funds to finance its assets. This past year the firm's return on total assets was 19%. The firm financed 30% percent of its assets using debt. What was the firm's return on common equity? | Audio Solution
    10. Last year YYY Company had a 7.00% net profit margin based on $24,000,000 in sales and $13,000,000 of total assets. During the coming year, the president has set a goal of attaining a 14% return on total assets. How much must firm sales equal, other things being the same, for the goal to be achieved? | Audio Solution
    11. Russell Securities has $267 million in total assets and its corporate tax rate is 40%. The company recently reported that its basic earning power (BEP) ratio was 50% and its return on assets (ROA) was 13%. What was the company's interest expense? (Answers are in millions.) | Audio Solution
    12. You are given the following information: Stockholders' equity = $205 million; price/earnings ratio = 43 shares outstanding = 11,080,000; and market/book ratio =6.75. Calculate the market price of a share of the company's stock. | Audio Solution
    13. Strack Houseware Supplies Inc. has $866 million in total assets.  The other side of its balance sheet consists of $95.26 million in current liabilities, $251.14 million in long-term debt, and $519.60 million in common equity. The company has 16,100,000 shares of common stock outstanding, and its stock price is $59 per share. What is Strack's market-to-book ratio? | Audio Solution
    14. Moss Motors has $108 million in assets, and its tax rate is 40%. The company's basic earning power (BEP) ratio is 42%, and its return on assets (ROA) is 11%. What is Moss' times-interest-earned (TIE) ratio? | Audio Solution
    15. The Wilson Corporation has the following relationships: Sales/Total assets = 3;Return on assets (ROA) = 15%; Return on equity (ROE) = 17%. What is Wilson's profit margin? | Audio Solution
    16. Cleveland Corporation has 13,240,000 shares of common stock outstanding, its net income is $241 million and its P/E is 15.1. What is the company's stock price? | Audio Solution
    17. Peterson Packaging Corp. has $2,072 million in total assets. The company's basic earning power (BEP) ratio is 13%, and its times-interest-earned ratio is 4.32. Peterson's depreciation and amortization expense totals $73 million. It has $55 million in lease payments and $39 million must go towards principal payments on outstanding loans and long-term debt. What is Peterson's EBITDA coverage ratio? | Audio Solution
    18. The Wilson Corporation has the following relationships: Sales/Total assets = 5; Return on total assets (ROA) = 13%; Return on common equity (ROE) = 16%. What is Wilson's debt ratio? | Audio Solution
    19. A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 25%. If sales were $61,000,000, the debt ratio was 40%, and total liabilities were $12,000,000, what would be the return on assets (ROA)? | Audio Solution
    20. Use the below to answer the next four questions                                   Balance Sheet
      Current assets
       Cash 960,000
       Acc receivable__________
       Inventories 1,440,000
      Fixed assets 4,800,000
      TOTAL ASSETS 8,000,000
      Current liabilities
       Acc payable _________
      Long-term debt 3,200,000
      Common stock 640,000
      Retained earnings 3,160,000
      TOTAL LIAB and EQUITY 8,000,000
       Income Statement
      Sales 24,000,000
      Operating expense 18,240,000
      EBIT 5,760,000
      Interest expense 416,000
      EBT 5,344,000
      Taxes 2,138,000
      Net income 3,206,000  What is the firm's days sales outstanding? | Audio Solution
    21. What is the firm's debt ratio? | Audio Solution
    22. What is the firm's quick ratio? | Audio Solution
    23. What is the firm's return on common equity? | Audio Solution
  9. Take the Chapter 3 Quiz.

Updated August 121, 2020
 
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