Module 5 Problems

Questions:  15

Select one of the limitations of ratio analysis and indicate why you believe it is a major concern.

Problems:  3

Given the following balance sheet, fill in the ratio values for 2013 and discuss how these results compare with both the industry average and prior average performance of Sophie Enterprises.  SOPHIE ENTERPRISES CONSOLIDATED BALANCE SHEET,  YEARS ENDED DECEMBER 31, 2012 AND 2013 Assets ($ Thousands) 2013 2012 2013 Cash $100 $90  Receivables $220 $170  Inventories $330 $230  Total Current Assets $650 $490  Property, Plant, and Equipment $1,850 $1,650  Depreciation $(330) $(225) Net Properties $1,520 $1,425  Intangibles $150 $150  Total Assets $2,320 $2,065  LIABILITIES AND SHAREHOLDERS' EQUITY 2013 2012

Accounts Payable $85 $105  Short-Term Bank Notes $125 $110  Current Portion of Long-term Debt $75 $-  Accruals $65 $85  Total Current Liabilities $350 $300  Long-Term Debt $625 $540  Deferred Taxes $100 $80  Preferred Stock (10%, $100 par) $150 $150  Common Stock ($2 par, 100,000 issued) $200 $200  Additional Paid-in Capital $325 $325  Retained Earnings $550 $470  Common Shareholders' Equity $1,950 $1,765  Total Liabilities and Shareholders' Equity $2,300 $2,065  SOPHIE ENTERPRISES CONSOLIDATED STATEMENT OF INCOME,

YEARS ENDED DECEMBER 31, 2012 AND 2013 ($ THOUSANDS)

2013 2012

Net Sales $3,500 $2,990  Cost of Goods Sold $2,135 $1,823  Selling, General, and Administrative Expenses $1,107 $974  Operating Profit $258 $193  Net Interest Expense $(62) $(54) Income from Operations $196 $139  Income Taxes $(66) $(47) Net Income $130 $92  Preferred Dividends $(15) $(15) Net Income Available for Common Shares $115 $77  Dividends Declared $40 $30  SOPHIE SOPHIE'S INDUSTRY (2013) AVERAGE AVERAGE

Current Ratio 2.000 2.200 Quick Ratio 1.000 1.100 Receivables Turnover 18.000 18.000 Average Collection Period 20.000 20.000 Total Asset Turnover 1.500 1.400 Inventory Turnover 11.000 12.500 Fixed Asset Turnover 2.500 2.400 Equity Turnover 3.200 3.000 Gross Profit Margin 0.400 0.350 Operating Profit Margin 8.000 7.500 Return on Capital 0.107 0.120 Return on Equity 0.118 0.126 Return on Common Equity 0.128 0.135 Deb-Equity Ratio 0.600 0.500 Debt-Total Capital Ratio 0.400 0.370 Interest Coverage 4.000 4.500 Fixed Charge Coverage 3.000 4.000 Cash Flow-Long Term Debt 0.400 0.450 Cash Flow-Total Debt 0.250 0.300 Rentention Rate 0.350 0.400

Problem 4

(Question 4 is composed of two parts.) The DuPont formula defines the net return on shareholders� equity as a function of the following components: � Operating margin � Asset turnover � Interest burden � Financial leverage � Income tax rate Using only the data in the table shown below: a. Calculate each of the five components listed above for 2010 and 2014, and calculate the return on equity (ROE) for 2010 and 2014, using all of the five components. Show calculations. b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2010 to 2014.

DONE

Ch 11: Intro to Security Valuation

Questions:  11

Under what conditions will it be ideal to use one or several of the relative valuation ratios to evaluate a stock?

Question 12

Discuss a scenario where it would be appropriate to use one of the present value of cash flow techniques for the valuation.

Problems:  7

Based on new information regarding the popularity of basketball, you revise your growth estimate for BBC to 9 percent. What is the maximum P/E ratio you will apply to BBC, and what is the maximum price you will pay for the stock?

Problem 14

You have been reading about the Madison Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent.

a. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Discuss your answer.

b. What would you pay for Madison Computer if its retention rate was 60 percent and its ROE was 19 percent? Show your work.