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Week 14 Homework
Chapter 4 Questions & Problems: 1, 3, 7, 8,12
1. Market Value Added. Here is a simplified balance sheet for Locust Farming:
Current assets $42,524 Current liabilities $29,755
Long-term assets 46,832 Long-term debt 27,752
Other liabilities 14,317
Equity 17,532
Total $89,356 Total $89,356
Locust has 657 million shares outstanding with a market price of $83 a share. (LO4-1)
a. Calculate the companys market value added.
Market capitalization = 657 x 83 = 54,531
Market value added = 54,531 17,532 = 36,999
b. Calculate the market-to-book ratio.
54,531 / 17,532 = 3.11
c. How much value has the company created for its shareholders as a percent of shareholders equity, that is, as a percent of the net capital contributed by shareholders)?
54,531 17,532 = $36,999
3. Measuring Performance. Here are simplified financial statements for Watervan Corporation:
INCOME STATEMENT
(Figures in $ millions)
Net sales $881
Cost of goods sold 741
Depreciation 31
Earnings before interest and taxes (EBIT) 109
Interest expense 12
Income before tax 97
Taxes 20
Net income 77
BALANCE SHEET
(Figures in $ millions)
Assets
Current assets $369 $312
Long-term assets 258 222
Total assets $627 $534
Liabilities and shareholders equity
Current liabilities $194 $157
Long-term debt 108 121
Shareholders equity 325 256
Total liabilities and shareholders equity $627 $534
The companys cost of capital is 8.5%. (LO4-2)
a. Calculate Watervans economic value added (EVA). after-tax operating income = (1 – tax rate) * interest expense + net income (1 – .35) * 12 + 63 = 70.80 (1 – .34) * 12 + 63 = 70.92 economic value added = after-tax operating income – (cost of capital * total capitalization) 121 + 256 = 377
b. What is the companys return on capital? (Use start-of-year rather than average capital.)
18.81%
c. What is its return on equity? (Use start-of-year rather
24.61%
7. Financial Ratios. Here are simplified financial statements for Phone Corporation in 2017:
INCOME STATEMENT
(Figures in $ millions)
Net sales $13,193
Cost of goods 4,060
Other expenses 4,049
Depreciation ? 2,518
Earnings before interest and taxes (EBIT) $ 2,566
Interest expense ? 685
Income before tax $ 1,881
Taxes (at 35%) ? 658
Net income $ 1,223
Dividends 856
BALANCE SHEET
(Figures in $ millions)
End of Year Start of Year
Assets
Cash and marketable securities $ 89 $ 158
Receivables 2,382 2,490
Inventories 187 238
Other current assets 867 932
Total current assets $ 3,525 $ 3,818
Net property, plant, and equipment 19,973 19,915
Other long-term assets 4,216 ? ? ? 3,770
Total assets $27,714 $27,503
Liabilities and shareholders equity
Payables $ 2,564 $ 3,040
Short-term debt 1,419 1,573
Other current liabilities 811 787
Total current liabilities $ 4,794 $ 5,400
Long-term debt and leases 7,018 6,833
Other long-term liabilities 6,178 6,149
Shareholders equity 9,724 9,121
Total liabilities and shareholders equity $27,714 $27,503
Calculate the following financial ratios for Phone Corporation using the methodologies listed for each part: (LO4-3)
a. Return on equity (use average balance sheet figures)
1,223 / [(9,724 + 9,121)/2] = .13
b. Return on assets (use average balance sheet figures)
[(1 – .35) x 685 + 1,223] / [(27,714 + 27,503) / 2] = 6%
c. Return on capital (use average balance sheet figures)
1,668.25 / (6,925.5 + 9,422.5) = .102
d. Days in inventory (use start-of-year balance sheet figures)
238 / (4,060/365) = 21 days
e. Inventory turnover (use start-of-year balance sheet figures)
4,060 / 238 = 17.06
f. Average collection period (use start-of-year balance sheet figures)
2,490 / (13,193/365) = 68 days
g. Operating profit margin
1,668.25 / 13,193 = .13
h. Long-term debt ratio (use end-of-year balance sheet figures)
7,018 / (7,018 + 9,724) = .42
i. Total debt ratio (use end-of-year balance sheet figures)
17,990 / 27,714 = .65
j. Times interest earned
2,566 / 685 = 3.746
k. Cash coverage ratio
(2,566 + 2,518) / 685 = 7.42
l. Current ratio (use end-of-year balance sheet figures)
3,525 / 4,794 = .735
m. Quick ratio (use end-of-year balance sheet figures
(89 + 2,382) / 4,794 = .515
8. Financial Ratios. Consider this simplified balance sheet for Geomorph Trading: (LO4-3)
Current assets $100 Current liabilities $ 60
Long-term assets 500 Long-term debt 280
Other liabilities 70
Equity 190
$600 $600
a. What is the companys debt-equity ratio?
2.15
b. What is the ratio of total long-term debt to total long-term capital?
0.59
c. What is its net working capital?
$40
d. What is its current ratio?
1.67
12. Leverage Ratios. Lever Age pays an 8% rate of interest on $10 million of outstanding debt with face value $10 million. The firms EBIT was $1 million. (LO4-3)
a. What is its times interest earned?
Times interest earned = EBIT/ Interest Payments
Where, EBIT = Earnings before interest and tax
Now, calculate the Time interest earned ratio as follows:
= 1 million/ 0.80 million
= 1.25
Therefore, the times earned ratio of firm L is 1.25
b. If depreciation is $200,000, what is its cash coverage ratio?
The EBIT, depreciation, and interest are $1 million, $200,000, and $0.80 million (computed above) respectively.
Cash coverage is a ratio to measure the ability of the company to meet its obligations from the operating cash flows.
Cash coverage ratio = EBIT + depreciation/ Interest payments
The following formula will be used to find the Cash coverage ratio. Compute the cash coverage ratio as follows:
= 1 million + 0.20 Million/ 0.80 million
= 1.50
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