Finance

FINC540

Assignment1
To Dr. Saad Metawa

Assignment no.1

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Presented by
Marwa Elnashar #800112790#

Assignment no.1

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3-13 (a)
Ratio Morton Industry Average

Current assets/Current liabilities Days sales outstanding Sales/Inventory Sales/Fixed assets Sales/Total assets Net income/Sales Net income/Total assets Net income/Common equity Total debt/Total assets

1.98

75 6.66 5.5 1.7 1.7% 2.9% 7.6% 61.9%

2.0 35 6.7 12.1 3.0 1.2% 3.6% 9.0% 60.0%

(b) Du Pont equation for Morton:

ROE = PM x T.A. turnover x EM = 7.6%

Du Pont equation for the industry:

ROE = PM x T.A. turnover x EM = 9%

(C) Mortons strengths and weaknesses: The firms days sales outstanding is more than twice the industry average, so the company has to decrease credit and to apply more strict credit policy. The total assets turnover ratio is less than the industry average so sales should be increased, assets decreased, or both. While the companys profit margin is higher than the industry average, its other profitability ratios are low compared to the industry--net income should be higher. However, the company is in an acceptable liquidity position and financial leverage.

(d) Ratios based on 2010 will be distorted, will have no actual meaning and will mislead investors.

Assignment no.1

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3-14 (a) Ratio Quick ratio Current ratio Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Return on assets Return on equity Debt ratio Profit margin on sales P/E ratio P/CF ratio
The company Industry Average

0.8 2.3 4.8 37 days 10.0 2.3 5.9% 13.1 54.8 2.5 5.0 2.0

1.0 2.7 7.0 32 days 13.0 2.6 9.1% 18.2 50.0 3.5 6.0 3.5

Only the Debt ratio is higher than the industry average, all the other ratios are below the industry average, which indicates that the firm is badly managed in many aspects.

(b) A decrease in the inventory level would improve the ROA, the inventory turnover and the total assets turnover. The lower cost of goods sold would improve all of the profitability ratios and will lead to a higher stock price.

Assignment no.1

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12-1

AFN

= (A*/S0)S - (L*/S0)S - MS1(1 - d) = (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3) = $410,000

12-2 AFN = (0.8)($1,000,000) - $100,000 - $90,000 = $610,000

Capital intensity ratio= A*/S0=0.8

It is higher than that of problem 12-1 because the assets are increased. This firm is more capital intensive.

12-3 AFN = (0.6)($1,000,000) - $100,000 300,000 = $200,000 There is a higher level of retained earnings that would reduce the additional funds needed.

Assignment no.1

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12-8 Income Statement Sales Operating costs Earnings before interest and taxes Interest Earnings before taxes Taxes (40%) Net income Dividends (45%) Addition to retained earnings Balance Sheet 2010 Cash Receivables Inventories Total current assets Net fixed assets Total assets Accounts payable Accruals Notes payable Total current liabilities Mortgage bonds Common stock Retained earnings Total liabilities and equity
$ 1,080

2010 $ 36,000 $ 32,440 $ 3,560 $ 460 $ 3,100 $ 1,240 $ 1,860 $ 837 $ 1,023

2011 $41,400 $ 37,306 $ 4,094 $ 560 $ 3,534 $ 1,414 $ 2,120 $ 954 $ 1,166

2011 without AFN

$ 1,242 $ 7,452 $ 10,350 $19,044 $ 14,490 $ 33,534 $ 4,968 $ 3,312 $ 2,100 $ 10,380 $ 3,500 $ 3,500 $ 14,026 $31,406 AFN= $ 2,128

2011 with AFN

$ 1,242 $ 7,452 $ 10,350 $19,044 $ 14,490 $ 33,534 $ 4,968 $ 3,312 $ 4,228 $12,508 $ 3,500 $ 3,500 $ 14,026 $ 33,534

$ 6,480 $ 9,000
$16,560

$ 12,600
$ 29,160 $ 4,320

$ 2,880 $ 2,100
$ 9,300

$ 3,500 $ 3,500 $ 12,860

$ 29,160

Assignment no.1

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