What can ratio analysis contribute to financial planning

Question

Assignment - Complete the practice questions or end of chapter questions for this book.

Chapter 1 -Introduction

Questions and Problems -

1. Please discuss the differences between the primary market and the secondary market.

2. Please discuss the issuing value of bonds and stocks during the period from 1980 to 2010. In addition, please calculate the growth rate of the new issue of these two instruments.

3. Please discuss the average daily trading volume of equity during the period from 1980 to 2009. In addition, please calculate the growth rate of the average daily trading volume of equity during this period.

4. What are security analysis and portfolio management? Is there any relationship between these two topics?

Chapter 2 - Accounting Information and Regression Analysis

Questions and Problems -

1. What is the value of accounting information in the process of financial analysis and planning? What are the components to annual and quarterly accounting information and their respective advantages and disadvantages for financial analysis and planning?

2. Define the following terms:

(a) Real versus financial market

(b) M₁ and M₂

(c) Leading economic indicators

(d) NYSE, AMEX, and OTC

(e) Primary versus secondary stock market

(f) Bond market

(g) Options and futures markets.

3. What are limits related to the use of accounting information? What are differences between accounting information and that of economics and finance that can result? How can these limits be overcome and differences reconciled?

4. Discuss the major difference between the linear and nonlinear break even analysis?

5. What can ratio analysis contribute to financial planning and analysis? What are the determinants of the dynamic adjustment process? How are target ratios derived?

6. What is the relationship between CVP and ratio analysis? How can it be used in financial analysis and planning?

7. Briefly discuss the issue related to net income (EAIT) in financial analysis and planning.

8. A market model is defined as

R_jt = A_j + B_jR_mt + ∈_j,

where R_jt, R_mt are rate of return for jth security and market rates of return, respectively; A_j is the intercept and B_j is the slope. Use the Ordinary Least Squares (OLS) theory and method discussed in Appendix A of this chapter to show how A_j and B_j can be estimated.

9. Parts of financial records for Company XYZ are:

Anticipated sales = $400,000

Degree of financial leverage=4/3

Variable cost = $200,000

Combined leverage effect = 2

Quantity sold = $100,000 units

Profit margin = 5%

Total debt = $200,000

Leverage ratio = 1/2

Common stock outstanding = 10,000 shares

Current price per share = $40

Retention rate = 1/2

IRR = 8%

Calculate the following:

(a) The total interest expense.

(b) The total fixed cost.

(c) The degree of operating leverage.

(d) The break-even quantity.

(e) The EAIT.

(f) Total corporation income tax expense.

(g) The return on net worth.

(h) The return on total asset.

(i) The EPS.

(j) The P/E ratio for common stock.

(k) The pay-out ratio for dividend.

(l) The growth rate for the common stock.

(m) The required rate of return.

(n) Total asset turnover.

(o) Analyze the financial situation of Company XYZ.

(p) If the probabilistic concepts are applied to break-even analysis, how should the analyses in (o) be revised?

10. Use the ratio information listed in Table 2.6 of the text to estimate the partial ratio adjustment model for GM and interpret the related results.

11. ABC Company's financial records are as follows:

Quantity of goods sold = 10,000

Price per unit sold = $20

Variable cost per unit sold = $10

Total amount of fixed cost = $50,000

Corporate tax rate = 50%

(a) Calculate EAIT.

(b) What is the break-even quantity?

(c) What is the DOL?

(d) Should the ABC Company produce more for greater profits?

12. ABC Company's predictions for next year are as follows:

	Probability	Quantity	Price ($)	Variable Cost/Unit ($)	Corporate Tax Rate
Stage 1	0.3	1,000	10	5	0.5
Stage 2	0.4	2,000	20	10	0.5
Stage 3	0.3	3,000	30	15	0.5

In addition, we also know that the fixed cost is $15,000. What is the next year's expected EAIT?

13. Use an example to discuss four alternative depreciation methods.

14. XYX, Inc. currently produces one product that sells for $330 per unit. The company's fixed costs are $80,000 per year; variable costs are $210 per unit. A salesman has offered to sell the company a new price of equipment which will increase fixed costs to $100,000. The salesman claims that the company's break-even number of units sold will not be altered if the company purchases the equipment and raises its price (assuming variable costs remain the same).

(a) Find the company's current break-even level of units sold.

(b) Find the company's new price if the equipment is purchased and prove that the break-even level has not changed.

15. Consider the following financial data of a corporation:

Sales =$500,000

Quantity = 25,000

Variable cost = $300,000

Fixed cost = $50,000

(a) Calculate the DOL at the above quantity of output.

(b) Find the break-even quantity and sales levels.

16. On the basis of the following firm and industry norm ratios, identify the problem that exists for the firm:

Ratio	Firm	Industry
Total Asset Utilization	2.0	3.5
Average Collection Period (days)	45	46
Inventory Turnover (times)	6	6
Fixed Asset Utilization	4.5	7.0

17. The financial ratios for Wallace, Inc., a manufacturer of consumer household products, are given below along with the industry norm:

Ratio	Firm			Industry
	1986	1987	1988
Current Ratio	1.44	1.31	1.47	1.2
Quick Ratio	0.66	0.62	0.65	0.63
Average Collection Period (days)	33	37	32	34
Inventory Turnover	7.86	7.62	7.72	7.6
Fixed Asset Turnover	2.60	2.44	2.56	2.8
Total Asset Turnover	1.24	1.18	2.8	1.20
Debt to Total Equity	1.24	1.14	0.84	1.00
Debt to Total Assets	0.56	0.54	0.46	0.50
Times Interest Earned	2.75	5.57	7.08	5.00
Return on Total Assets	0.02	0.06	0.07	0.06
Return on Equity	0.06	0.12	0.12	0.13
Net Profits Margin	0.02	0.05	0.05	0.05

Analyze Wallace's ratios over the three-year period for each of the following categories:

(a) Liquidity

(b) Asset utilization

(c) Financial leverage

(d) Profitability

18. Below are the Balance Sheet and the Statement of Earnings for Nelson Manufacturing:

Balance Sheet for Nelson on 12/31/88

Assets
Cash and Marketable Securities	$125,000
Accounts Receivable	$239,000
Inventories	$225,000
Prepaid Expenses	$11,000
Total Current Assets	$600,000
Fixed Assets (Net)	$400,000
Total Assets	$1,000,000
Liabilities and Stockholder's Equity
Account Payable	$62,000
Accruals	$188,00
Long-Term Debt Maturing in 1 year	$8,000
	$258,000
Long-Term Debt	$221,000
Total Liabilities	$479,000
Stockholder's Equity
Preferred Stock	$5,000
Common Stock (at par)	$175,000
Retained Earnings	$341,000
Total Stockholder's Equity	$521,000
Total Liabilities and Stockholder's Equity	$1,000,000

Statement of Earnings for Nelson for Year Ending 12/31/88

Net sales	$800,000
Less: Cost of Goods Sold	$381,600
Selling, General, and Administrative Expense	$216,800
Interest Expense	$20,000
Earnings before Taxes	$181,200
Less: Tax Expense (40%)	$72,480
Net Income	$108,720

(a) Calculate the following ratios for Nelson.

	Nelson	Industry
(1) Current Ratio		3.40
(2) Quick Ratio		8.43
(3) Average Collection Period		88.65
(4) Inventory Turnover		6.46
(5) Fixed Asset Turnover		4.41
(6) Total Asset Utilization		1.12
(7) Debt to Total Equity		0.34
(8) Debt to Total Assets		5.25
(9) Times Interest Earned		12.00
(10) Return on Total Assets		0.12
(11) Return on Equity		0.18
(12) Net Profit Margin		0.12

(b) Identify Nelson's strengths and weaknesses relative to the industry norm.

Textbook - "Security Analysis, Portfolio Management and Financial Derivatives" by By Cheng-Few Lee, Joseph Finnerty, John Lee, Alice C Lee, And Donald Wort.