Principles Of Managerial Finance

FIN-504: Finance Principles, Grand Canyon University, USA

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Question 1: Balance sheet preparation Use the appropriate items from the following list to pre-pare Mellark's Baked Goods balance sheet at December 31, 2019.

Answer: Balance sheet for Mellark Baked foods:

Question 2: Liquidity ratio Josh Smith has compiled some of his personal financial data to determine his liquidity position. The data are as follows.

a. Calculate Josh's liquidity ratio.

b. Several of Josh's friends have told him that they have liquidity ratios of about 1.8. How would you analyze Josh's liquidity relative to his friends?

Answer: Liquidity ratio can easily be computed with current ratio which is relation between current assets and current liabilities. (Collier 2015)

Question 3: Inventory management Three companies that compete in the footwear market are Foot Locker, Finish Line, and DSW. The table below shows inventory levels and cost of goods sold for each company for the 2016, 2015, and 2014 fiscal years. Calculate the inventory turnover ratio for each company in each year and summa-rize your findings. All values are in $ millions.

Answer:

Inventory turnover ratio provides frequency at which inventory is converted. Larger the turnover ratio, better for the organization. All three firms are with almost stable ITR in last three years. Looking into year 2016, DSW has highest ITR of 3.96 times making it most efficient from other two.

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Question 4: Profitability analysis The table below shows 2016 total revenues, cost of goods sold, earnings available for common stockholders, total assets, and stockholders' equity for three companies competing in the bottled drinks market: The Coca-Cola Company, Pepsico Inc., and Dr Pepper Snapple Group. All dollar values are in thousands.

Answer: Profitability ratios:

a. Use the information given to analyze each firm's profitability in as many different ways as you can. Which company is most profitable? Why is this question diffi-cult to answer?

Answer: Looking into net profit ratio of different companies, Coca cola has highest Net profit ratio of 15.60% which makes it most profitable company. However, looking other items of financial statements which are resources used by business i.e. Equity and assets, Coca cola company has lowest ROA and ROE making it difficult to answer.

b. For each company, ROE > ROA. Why is that so? Look at the difference between ROE and ROA for each company. Does that difference help you determine which firm uses the highest percentage of debt to finance its activities?

Answer: ROE is greater than ROA on account of lower portion of Equity in comparison to assets. Both these ratios are compared with net profits and as Equity is lower than assets, ROE is greater. Looking total asset to debt ratio provides relation of debts and assets. As ratio is lowest for Pepsico, company is using highest debt.

Question 5: Using Tables 3.1, 3.2, and 3.3, conduct a complete ratio analysis of the Bartlett Company for the years 2018 and 2019. You should assess the firm's liquidity, activ-ity, debt, and profitability ratios. Highlight any particularly positive or negative developments that you uncover when comparing ratios from 2018 and 2019.

Answer: Ratio Analysis of Bartlett Company for FY 18 and 19:

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Liquidity ratios: Current ratio in business has decreased from 2.08 times to 1.97 times. However, quick ratio has improved. This shows that portion of stock has increased in current assets in FY 2019. Firm liquidity position seems sound based on current ratio of 2 times and liquid ratio of 1.5 times.

Activity ratios: Inventory turnover ratio has increased in busiess which is indicator of converting inventory into goods at much faster speed which is positive sign for organization. (Laitinen, 2018) Debtor collection period of more than 50 days is much large. However, has remained stable in last two years.

Debt Ratio: Portion of debts has increased in year 2019. From figures of debts and assets, it seems that business has used debts to finance its assets. However, the positive sign is improvement in interest earned ratio which also indicates improved profitability in business.

Profitability Ratios: Profitability in business has improved this year significantly and in all fronts. Profits from operations or an overall profit both has increased. Most of expenses have remained stable despite of increased sales number in business. This is positive sign for business.

Question 6: Analysis of debt ratios Financial information from fiscal year 2016 for two compa-nies competing in the cosmetics industry-The Estée Lauder Companies and e.l.f. Beauty Inc.-appears in the table below. All dollar values are in thousands.

Answer:

a. Calculate the debt ratio and the times interest earned ratio for each company. In what way are these companies similar in terms of their debt usage, and in what way are they very different?

Answer: Both the companies are similar in using the percentage of debts to finance its assets. Debt contribution in total assets ranges from 60-70%.

Companies are different in their interest earning ratio. Estee is earning interest of 23 times of EBIT whereas Beauty is only earning 1.60 times of EBIT.

b. Calculate the ratio of interest expense to total liabilities for each company. Conceptually, what do you think this ratio is trying to measure? Why are the values of this ratio dramatically different for these two firms? Suggest some reasons.

Answer: Interest liability ratio:3

Ratio is trying to measure the net cost which business is paying upon liabilities. There is so dramatic difference in ratios as there are huge differences in level of operations both entities have and interest expense in Estee is only of 4% while same is 62% for beauty.

Question 7: Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2019, follow.

Based on a 365-day year and on end-of-year figures.

a. Use the preceding financial statements to complete the following table. Assume that the industry averages given in the table are applicable for both 2018 and 2019.

Answer: Computing Ratios:

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b. Analyze Zach Industries' financial condition as it is related to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market. Summarize the company's overall financial condition.

Answer: Analyses of Zach Industries: 

Liquidity ratios: Current ratio and quick ratios are indicator of liquidity in business. Both of these ratios have decreased in FY 19 which indicates tight liquidity position in business. Current ratio of near 1 is just sufficient to meet current liabilities. Quick ratio of below 0.50 times indicates that business is not in position to pay of immediate liabilities. (Penman, 2015)

Activity Ratio: Inventory turnover ratio and debtor collection period are important indicator of management efficiency in business. Here also, both ratios have depleted and same is also low from industry standards which shows that management has lose its efficiency to manage operations.

Debt ratios: Debt ratio and interest earned ratio shows position of debts in business and their capability to pay off same. Debt ratio has decreased which is positive sign and this is below industry norms. However, EBIT in business has decreased in relation to interest as indicated by Interest earned ratio. (Bhatia 2016)

Profitability ratios: This can be judged using GP and NP ratio along with return on assets and equity earned by business. In 2019, GP has decreased which shows profits from core operations have decrease. Surprisingly, net profit has increased and crossed industry standard. ROA and ROE bath have improved and has outperformed industry.

Market ratios: Relation between book value and market value is important indicator of internal wealth and market value of share. Share in market is much higher than its book value which shows confidence of shareholders in stock. (Paul, 2017)

Question 8: DuPont system of analysis Use the following 2016 financial information for ATT and Verizon to conduct a DuPont system of analysis for each company.

Answer:

a. Which company has the higher net profit margin? Higher asset turnover?

Answer: Verizon has higher net margin ratio. Verizon margin is of 10% against margin of 8.1% in ATT. Same way, Verizon has higher asset turnover ratio in business.

b. Which company has the higher ROA? The higher ROE?

Answer: Verizon again has higher ROA of 5.57 against 3.3 of ATT. ROE is higher of ATT than of Verizon.

Question 9: Cash disbursements schedule Maris Brothers Inc. needs a cash disbursement sched-ule for the months of April, May, and June.

Answer: Cash disbursement schedule:

Computing Cash Payment On Purchases:

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Question 10: Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.

Answer:

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