FIn 410, Homework 8

The process of decomposing ROE into a series of component ratios is called ______________.

DuPont Analysis

ROS (Return on Sales) EX. In 2012 Flathead generated ____ of EBIT for every dollar of Sales

EBIT/ Sales = a cent value This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales

Operating ROA is calculated as __________, while ROE is calculated as _________.

EBIT/Total assets; Net profit/Equity

Cash Flow From Operating Expenses

Net Income Add: Depreciation Expense + Change in accts receivable - Increase In Inventory + Increase in Accounts Payable

ROE

Net income/ Avg Total Equity Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Total Asset Turnover (ATO)

Sales / AVG Total Assets The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated per dollar of assets

P/E Ratio

(gross profit/ # of shares) / (net income/ # of shares) or Price per share /(net income /# of shares) In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E

Avg Collection Period

-first Find Average Accounts Receivable -- ACP = Avg Ar/Sales * 365 The approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

1; uses no interest-bearing debt

Compound Leverage Ratio

= (Pretax Profit/EBIT) * [((total assets for 2012 + Total assets for 2011)/2) / ((total equity 2012+ totalequity 2011)/2 )]

Which of the following will result in an increase in cash to the firm?

An increase in accounts payable

Inventory Turnover

Cogs/ Avg Inventory, an efficiency ratio that shows how quickly a company uses up its supply of goods over a given time frame.

If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.

Decrease

In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Hewlett-Packard change?

HP cash flow from financing: -$5,241 - $894 + $196 + x = -$6,077; x = -$138

A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: I. Lower ATO than the industry average II. Lower ROA than the industry average III. Lower ROE than the industry average

I, II, and III

Which of the following transactions will result in a decrease in cash flow from operations?

Increase in accounts receivable

Current Ratio

Measures liquidty, a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. Total Current Assets/ Total Current Liabs

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

P/E = 2.38/.20 = 11.9

A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

ROE = (.7)(1.3)(.8)(.10)(2.28) = 16.6%

A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

ROE = ROA × Leverage = .08(1.5) = .12

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

ROE= (1-.30) [.19+1.8(.19-.07)] = .2842

Operating ROA can be found as the product of ______.

Return on sales × ATO

What must have caused the firm's ROE to drop?

The compound leverage ratio was less than 1 Feedback: Compound leverage ratio = (Interest burden)( Leverage ratio) < 1 each year and falling

A high price-to-book ratio may indicate which one of the following?

The firm expanded its plant and equipment in the past few years. The firm is doing a poorer job controlling its inventory expense than other related firms. ***Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.*** All of these options.

Common-size balance sheets are prepared by dividing all quantities by ____________.

Total Assets

Debt-to-Equity ratio

Total Liabs/ Total Equity It indicates what proportion of equity and debt the company is using to finance its assets

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

greater than ROE

All of the following ratios are related to efficiency except _______.

total asset turnover fixed-asset turnover average collection period ***cash ratio***