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Discount Assign
Week14Homework.docxWeek 14 Homework
Chapter 4 Questions & Problems: 1, 3, 7, 8,12
1. Market Value Added. Here is a simplified balance sheet for Locust Farming:
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Current assets $42,524 Current liabilities $29,755 Long-term assets 46,832 Long-term debt 27,752 Other liabilities 14,317 Equity 17,532 Total $89,356 Total $89,356 |
Locust has 657 million shares outstanding with a market price of $83 a share. (LO4-1)
a. Calculate the company’s market value added.
Market capitalization = 657 x 83 = 54,531
Market value added = 54,531 – 17,532 = 36,999
b. Calculate the market-to-book ratio.
54,531 / 17,532 = 3.11
c. How much value has the company created for its shareholders as a percent of shareholders’ equity, that is, as a percent of the net capital contributed by shareholders)?
54,531 – 17,532 = $36,999
3. Measuring Performance. Here are simplified financial statements for Watervan Corporation:
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INCOME STATEMENT (Figures in $ millions) |
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Net sales $881 Cost of goods sold 741 Depreciation 31 Earnings before interest and taxes (EBIT) 109 Interest expense 12 Income before tax 97 Taxes 20 Net income 77 |
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BALANCE SHEET (Figures in $ millions) |
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Assets Current assets $369 $312 Long-term assets 258 222 Total assets $627 $534 Liabilities and shareholders’ equity Current liabilities $194 $157 Long-term debt 108 121 Shareholders’ equity 325 256 Total liabilities and shareholders’ equity $627 $534 |
The company’s cost of capital is 8.5%. (LO4-2)
a. Calculate Watervan’s economic value added (EVA). after-tax operating income = (1 - tax rate) * interest expense + net income (1 - .35) * 12 + 63 = 70.80 (1 - .34) * 12 + 63 = 70.92 economic value added = after-tax operating income - (cost of capital * total capitalization) 121 + 256 = 377
b. What is the company’s return on capital? (Use start-of-year rather than average capital.)
18.81%
c. What is its return on equity? (Use start-of-year rather
24.61%
7. Financial Ratios. Here are simplified financial statements for Phone Corporation in 2017:
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INCOME STATEMENT (Figures in $ millions) |
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Net sales $13,193 Cost of goods 4,060 Other expenses 4,049 Depreciation 2,518 Earnings before interest and taxes (EBIT) $ 2,566 Interest expense 685 Income before tax $ 1,881 Taxes (at 35%) 658 Net income $ 1,223 Dividends 856 |
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BALANCE SHEET (Figures in $ millions) |
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End of Year Start of Year |
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Assets Cash and marketable securities $ 89 $ 158 Receivables 2,382 2,490 Inventories 187 238 Other current assets 867 932 Total current assets $ 3,525 $ 3,818 Net property, plant, and equipment 19,973 19,915 Other long-term assets 4,216 3,770 Total assets $27,714 $27,503 Liabilities and shareholders’ equity Payables $ 2,564 $ 3,040 Short-term debt 1,419 1,573 Other current liabilities 811 787 Total current liabilities $ 4,794 $ 5,400 Long-term debt and leases 7,018 6,833 Other long-term liabilities 6,178 6,149 Shareholders’ equity 9,724 9,121 Total liabilities and shareholders’ equity $27,714 $27,503 |
Calculate the following financial ratios for Phone Corporation using the methodologies listed for each part: (LO4-3)
a. Return on equity (use average balance sheet figures)
1,223 / [(9,724 + 9,121)/2] = .13
b. Return on assets (use average balance sheet figures)
[(1 - .35) x 685 + 1,223] / [(27,714 + 27,503) / 2] = 6%
c. Return on capital (use average balance sheet figures)
1,668.25 / (6,925.5 + 9,422.5) = .102
d. Days in inventory (use start-of-year balance sheet figures)
238 / (4,060/365) = 21 days
e. Inventory turnover (use start-of-year balance sheet figures)
4,060 / 238 = 17.06
f. Average collection period (use start-of-year balance sheet figures)
2,490 / (13,193/365) = 68 days
g. Operating profit margin
1,668.25 / 13,193 = .13
h. Long-term debt ratio (use end-of-year balance sheet figures)
7,018 / (7,018 + 9,724) = .42
i. Total debt ratio (use end-of-year balance sheet figures)
j. Times interest earned
2,566 / 685 = 3.746
k. Cash coverage ratio
(2,566 + 2,518) / 685 = 7.42
l. Current ratio (use end-of-year balance sheet figures)
3,525 / 4,794 = .735
m. Quick ratio (use end-of-year balance sheet figures
(89 + 2,382) / 4,794 = .515
8. Financial Ratios. Consider this simplified balance sheet for Geomorph Trading: (LO4-3)
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Current assets $100 Current liabilities $ 60 Long-term assets 500 Long-term debt 280 Other liabilities 70 Equity 190 $600 $600 |
a. What is the company’s debt-equity ratio?
2.15
b. What is the ratio of total long-term debt to total long-term capital?
0.59
c. What is its net working capital?
$40
d. What is its current ratio?
1.67
12. Leverage Ratios. Lever Age pays an 8% rate of interest on $10 million of outstanding debt with face value $10 million. The firm’s EBIT was $1 million. (LO4-3)
a. What is its times interest earned?
Times interest earned = EBIT/ Interest Payments
Where, EBIT = Earnings before interest and tax
Now, calculate the Time interest earned ratio as follows:
= 1 million/ 0.80 million
= 1.25
Therefore, the times earned ratio of firm L is 1.25
b. If depreciation is $200,000, what is its cash coverage ratio?
The EBIT, depreciation, and interest are $1 million, $200,000, and $0.80 million (computed above) respectively.
Cash coverage is a ratio to measure the ability of the company to meet its obligations from the operating cash flows.
Cash coverage ratio = EBIT + depreciation/ Interest payments
The following formula will be used to find the Cash coverage ratio. Compute the cash coverage ratio as follows:
= 1 million + 0.20 Million/ 0.80 million
= 1.50
