1. CALCULATING AND INTERPRETING FIXED ASSETS TURNOVER RATIOS. Texas Instruments (TI) designs and manufactures semiconductor products for use in computers, telecommunications equipment, automobiles, and other electronics- based products. The manufacturing of semiconductors is highly capital-intensive. Hewlett- Packard Corporation (HP) manufactures computer hardware and various imaging products, such as printers and fax machines. Exhibit 4.25 presents selected data for TI and HP for 2006-2008.
Required
a. Compute the fixed assets turnover for each firm for 2006, 2007, and 2008.
b. Suggest reasons for the differences in the fixed assets turnovers of TI and HP.
c. Suggest reasons for the changes in the fixed assets turnovers of TI and HP during the three-year period.
2. CALCULATING AND INTERPRETING THE RATE OF RETURN ON COMMON SHAREHOLDERS' EQUITY AND ITS COMPONENTS. JCPenney operates a chain of retail department stores, selling apparel, shoes, jewelry, and home furnishings. It also offers most of its products through catalog distribution. During fiscal Year 5, it sold Eckerd Drugs, a chain of retail drugstores, and used the cash proceeds, in part, to repurchase shares of its common stock. Exhibit 4.26 presents selected data for JCPenney for fiscal Year 3, Year 4, and Year 5.
Required
a. Calculate the rate of ROA for fiscal Year 3, Year 4, and Year 5. Disaggregate ROA into the profit margin for ROA and total assets turnover components. The income tax rate is 35 percent.
b. Calculate the rate of ROCE for fiscal Year 3, Year 4, and Year 5. Disaggregate ROCE into the profit margin for ROCE, assets turnover, and capital structure leverage components.
c. Suggest reasons for the changes in ROCE over the three years.
d. Compute the ratio of ROCE to ROA for each year.
e. Calculate the amount of net income available to common stockholders derived from the use of financial leverage with respect to creditors' capital, the amount derived from the use of preferred shareholders' capital, and the amount derived from com- mon shareholders' capital for each year.
f. Did financial leverage work to the advantage of the common shareholders in each of the three years? Explain.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.