Homework Week #3 PDF

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XXXXXX FIN-630-003 Professor Nakshbendi (09/12/2020) Homework Week #3 Q(3-2): Financial  ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios? T  he emphasis of the various types of analysts is by no means uniform nor should it be. Management is interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should be strengthened; second, management recognizes that the other parties are interested in all the ratios and that financial appearances must be kept up if the firm is to be regarded highly by creditors and equity investors. Equity investors are interested primarily in profitability, but they examine the other ratios to get information on the riskiness of equity commitments. Long-term creditors are more interested in the debt ratio, TIE, and fixed-charge coverage ratios, as well as the profitability ratios. Short-term creditors emphasize liquidity and look most carefully at the liquidity ratios.

Q(3-6): Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry? T  he main reason why it can be misleading to compare a company’s financial ratios with its competitors is that firms within the same industry may employ different accounting techniques that make it difficult to compare financial ratios, more fundamentally, comparisons may be misleading if firms in the same industry differ in their other investments. for example, comparing PepsiCo and Coca-Cola may be misleading because apart from their soft drinks business, Pepsi also owns other businesses, such as Frito-lay and quaker. This is only

Problem(3-2): Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25 million in long-term debt. What is the debt ratio? DEBT-RATIO = Total debt/Total asset = (($5million+$25million)/$200 million) = 0.15 or 15% debt ratio.

Problem(3-6): Gardial & Son has a ROA of 12%, a 5% profit margin, and a return on equity equal to 20%. What is the company’s total assets turnover? What is the firm’s equity multiplier? a. Total assets turnover = Sales/Total assets = 0.12/0.05 = 2.4 b. Equity multiplier =  ROE/ROA or Total assets/stakeholder’s equity. Equity multiplier = 0.20/0.12 = 1.67...