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TCH 302 – PRINCIPLES OF FINANCE TUTORIAL 3 1. You have the following information for Estée Lauder Companies:

a. Calculate the following ratios: - Return on assets.

(703+64)/((5336 +6274)/2)

- Operating profit margin. (8810-1937-5486)/8810 - Sales-to-assets ratio. 8810/5336 - Inventory turnover. 1937/((996+827)/2) - Debt–equity ratio. 3370/1948 - Current ratio. 3121/1572 - Quick ratio (1121+746)/1572 b. Calculate a common-size balance sheet and income statement for Estée Lauder. 2. Magic Flutes has total receivables of $3,000, which represent 20 days’ sales. Total assets are $75,000. The firm’s operating profit margin is 5%. Find the firm’s sales-to-assets ratio and return on assets. -sales-to-assets: 3000/75000 -ROA: (3000*95%)/75000 3. Consider this simplified balance sheet for Geomorph Trading

a. Calculate the ratio of debt to equity. (600-190)/190 b. What are Geomorph’s net working capital and total long-term capital? Calculate the ratio of debt to total long-term capital. -working capital: 100-60=40 - debt to total long-term capital: 810/(500-280) c. Suppose that at year-end Geomorph had $30 in cash and marketable securities. Immediately after the year-end it used a line of credit to borrow $20 for one year, which it invested in additional marketable securities. Would the company appear

to be (a) more or less liquid, (b) more or less highly leveraged? Make any additional assumptions that you need. -Cash:30, current liabilities:20 -current asset: (100+30+20)/(60+20) -debt-equity: (810+20)/190=>higher leveraged 4. You have the following information taken from the 20x5 financial statements of Computronixs Corporation and Digitek Corporation: (All figures are in $ millions except for the second and final three rows.)

Compare and contrast the financial performance of the two companies using the financial ratios discussed in the lecture. -profit: +EBIT/sales +net/sales -Interest coverage: EBIT/Interest expense -leverage: (asset-equity)/equity, (asset-equity)/asset -valuation: [200*(15+12)/2]/equity

-EPS= 5. Discuss alternative measures of financial leverage. Should the market value of equity be used or the book value? Is it better to use the market value of debt or the book value? How should you treat off-balance-sheet obligations such as pension liabilities? How would you treat preferred stock? 6. Suppose it is Apr 15 and you just received your monthly credit card statement with the new balance of $2,000. The payment is due on May 5, but your spouse panics at the sight (and size) of the balance and wants to pay it immediately. If you practice the principles of cash cycle time management in your personal finance, when would you make the payment? Why? What danger exists in adopting this strategy? 7. How would the following actions affect a firm’s current ratio? a. Inventory is sold=> liquidity, inventory turnover increase, inventory days decrease b. The firm takes out a bank loan to pay its suppliers=> c. The firm arranges a line of credit with a bank that allows it to borrow at any time to pay its suppliers. d. A customer pays its overdue bills. e. The firm uses cash to purchase additional inventories. 8. Suppose you own a firm that manufactures pool tables. Thirty days ago, you hired a consultant to examine your business and suggest improvements. The consultant’s proposal, if implemented, would allow your firm to shorten the time between each sale and the subsequent cash collection by 20 days, slightly lengthen the time between inventory purchase and sale by only 5 days, but shorten the time between inventory purchase and your firm’s payment of the bill by 15 days. Would you implement the consultant proposal? Why? 9. In general, the principles of cash cycle time management call for a firm to shorten (minimise) the time it takes to collect receivables, and lengthen (maximise) the time it takes to pay amounts it owes to suppliers. Explain what tradeoffs need to be managed if

the firm offers discounts to customers who pay early, and the firm also foregoes discounts offered by its suppliers by extending the time until it pays invoices. 10. Some furniture companies conduct highly advertised annual sale events in which customers can either take an up-front discount for a cash (or credit card) purchase, or defer finance charges for up to one year on their purchases by charging it to the company’s credit account. Assume that the two options do not present a time value of money advantage for the company. In terms of cash cycle management: (1) Why does the company offer the discount? (2) Why might the company be willing to forego cash collection for one year if a customer chooses to defer? What risk does the company assume in the deferment case that it does not assume in the discount case?...