MARKETING

226 Part 2 Analysis and Valuation of Equity Securities

extraordinary gains and losses 223

forward price-earnings ratio 213

income statemerrt 2OO inflation-adjusted

accounting 221, liquidity ratios 2L-1.

price ratios ztz profitabilityratios 2O8 statement of cash

flows 2O3 trailing price-earnings

ratio 273 trend analysis 217

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ffi PRAcrtcE pRoBLEMS AND solurtoNs 1. Given the following financial data: Net income/Sales : 4 percent; Sales/Total

assets : 2.8 times; Debt/Total assets : 40 percent; compute: ct. Return on assets. b. Return on equity. c. If the Debt/Total assets ratio were 70 percent, what would Return on

equity be?

ffi KEY woRDs AND coNcEPTs asset-utilization

ratios 21O balance sheet 2Ol debt-utilization

ratios 21'1, dividend-payout

ratio 21.4 dividendyield 214

ffi DlscusstoN ouEsrroNs @oo", abalance sheet that is dated year-end 2007 reflect only transacrions for

that year? /an (])Explain why the statement of cash flows is particularly relevanr in light of the

fact that the accruai method of accounting is used in the income statement and balance sheet.

() aur-, we automatically assume that afirm that has an operating loss on the income statement has reduced the cash flows for the firm during the period?

\X4tat ratios are likely to be of greatest interest to the banker or trade creditor? To the bondholder?

p ff a firm's operating margin and after-tax margin are almost the same (an unusual case), what can we say about the firm?

6. comment on the heary capital goods industry and the food-processing indus- try in terms of performance under the DuPont system of analysis.

7. In computing return on assets, how does the age of the assets influence the interpretation of the values?

8. If a firm's return on equity is substantially higher than the firm's return on assets, what can the analyst infer about the firm?

9. How do the asset-utilization ratios relate to the liquidity ratios? LO. Can public utility firms better justify the use of high debt than firms in the auto-

mobile or airline industry? Comment. LL. Vhy will the fixed-charge-coverage ratio always be equal to or /ess than times

interest earned? 12. what might a high dividend-payout rario suggesr ro an analyst about a compa-

ny's growth prospects? lJ. Explain the probable impact of replacement-cost accounting on the ratios of

return on assets, debt to total assets, and times interest earned for a firm that has substantial old fixed assets.

DuPont analysis