CORPORATE FINANCE

REI, second year, first term, 2015-2016

Financial Ratios
1. Based on the financial statements for the company described below determine and
comment its financial ratios for 2014:
1)
2)
3)
4)
5)

Short-term solvency
Activity
Financial leverage
Profitability
Value (price per share = 18 RON, no. of shares = 12,000)

Balance Sheet:
Cash
Accounts receivable
Inventories
Buildings&equipment (Gross Value)
Minus Fixed assets depreciation
Buildings&equipment (Net Value)
Land

December
31st 2013
30,000
250,000
100,000
168,000
33,000
135,000
37,000

December
31st 2014
15,000
230,000
170,000
192,000
42,000
150,000
41,000

2,000
32,000
45,000
310,000
113,000
50,000

2,000
39,000
50,000
327,000
138,000
50,000

Taxes payables
Notes Payable
Accounts Payable
Bonds
Accumulated Retained Earnings
Common Stock

Operating Revenues
Cost of Goods Sold
Selling, general and administrative expenses
Depreciation
Operating Income
Other Revenues
Other Expenses (except Interest)
Earnings before Interest And Taxes (EBIT)

920,000 RON
(710,000) RON
(98,000) RON
(9,000) RON
103,000 RON
0 RON
0 RON
103,000 RON

Interest expenses
Earnings before Taxes (EBT)
Corporate Income Tax (50%)
Net Income

(43,000) RON
60,000 RON
(30,000) RON
30,000 RON

Fill in the following table. Comment on the situation and performance of the company
described by the problem in comparison to the industry to which it belongs.
Ratio category
Short-term solvency
Activiy

Financial Leverage

Profitability

Value

Ratio
Current Ratio

The Company

Quick Ratio
Total Assets Turnover
Receivables Turnover
Average Collection
Period
Inventory Turnover
Days in Inventory
Debt Ratio
Debt-to-Equity
Equity Multiplier
Interest Coverage
Profit Margin
ROA
ROE
PER
Dividend Yield
Market-to-book value

0.8
2.5
30 days
8.0
68%

2.4
1.2%
3%
9.2%

2. Given the following indicators for a company:

Cash (average)
Fixed Assets (average)
Total Operating Revenues
Net Income
Quick Ratio
Current Ratio
Average collection period
ROE

100.00
283.5
1,000.00
50.00
2.0
3.0
40 days
12%

a) Determine the following:

I.
II.
III.
IV.
V.
VI.
VII.

Industry Average
1.8

Accounts receivable (average)

Current Liabilities (average)
Current Assets (average)
Total Assets (average)
ROA
Equity (average)
Long term debt (average)

b) If the company could reduce its average collection period from 40 to 30 days, keeping all
other things equal, how much cash would this action generate?
3. Given the following information about a company:
Total Asset Turnover:1.5,
ROA: 3%,
ROE: 5%,
determine its profit margin and the debt ratio.
4. Given the following information:
Balance Sheet (average values: (2014+2013)/2)
Cash
77,500 Accounts payable
Accounts Receivable
336,000 Notes Payable
Inventories
241,500 Other current assets

129,000
84,000
117,000

Total Current Assets

655,000 Total Current Liabilities

330,000

Fixed Assets (net)

292,500 Long-Term Debt

Equity
947,500 Total Equity & Liabilities

256,500
361,000
947,500

Total Assets

Income Statement (2014)

Total Operating Sales
Cost of Goods Sold
- Raw materials
- Salaries
- Electricity & water
- Overhead
- Depreciation
Selling Expenses
General Administrative Expenses
EBIT
Interest expenses
EBT
Income tax
Net Income
Financial Ratios:
Financial Ratios
Current Ratio
Average collection period
Inventory Turnover
Total Assets Turnover
Profit Margin
ROA
ROE

1,607,500
(717,000)
(453,000)
(68,000)
(113,000)
(41,500)
(115,000)
(30,000)
70,000
(24,500)
45,500
(18,200)
27,300

The Company

Industry Average
2.0
35.0 days
6.7
3.0
1.2%
3.6%
9.0%

a. Determine the financial ratios for the company.

b. Build the Du-Pont Equation for the company and the Industry.
c. What are the strengths and the weaknesses of the company?
5. Complete the following balance sheet and the information required from the Income
Statement using the data below:
-debt ratio: 50%
- quick ratio: 0.8
- total assets turnover: 1.5
- Average collection period: 36 days
- profit margin: 25%
- Inventories turnover: 10
Cash
Accounts Receivable
Inventories
Fixed Assets (net)
Total Assets

Accounts payable
Long-Term Debt
Equity
Retained Earnings
300,000 Total Equity & Liabilities

Total operating revenues

60,000
97,500

HOMEWORK:
1. You have recently been given a job as financial analyst for a company whose main activity
is manufacturing computer parts. Your first assignment is to make a financial analysis of the
latest two years. Your supervisor provided you with the following data:

Balance Sheet:
Cash
Accounts receivable
Inventories
Total current assets
Fixed assets (Gross Value)
Minus Fixed assets depreciation
Fixed Assets (Net Value)
Total assets

December
31st 2013
()
69,120
421,440
858,240
1,348,800
589,200
175,440
413,760
1,762,560

December
31st 2014
()
62,400
482,400
1,003,200
1,548,000
632,400
199,440
432,960
1,980,960

Accounts Payable
Short-term bank credit
Accruals
Total current liabilities
Bonds
Common Stock
Accumulated Retained Earnings
Total Equity
Total liabilities and equity

174,720
240,000
163,200
577,920
388,118
552,000
244,522
796,522
1,762,560

210,240
270,000
168,000
648,240
509,534
552,000
271,186
823,186
1,980,960

Income statement:
Total operating revenues
Cost of goods sold
General expenses
Depreciation
EBIT
Interest expenses
EBT
Income tax (40%)
Net Income

2013 ()
4,118,400
3,436,800
408,000
22,680
250,920
75,000
175,920
70,368
105,552

Other Data
Market price of shares on December
31st
Number of shares
Dividends per share
Payments for leasing contracts

2014 ()
4,620,000
3,900,000
516,360
24,000
179,640
91,200
88,440
35,376
53,064

2013

2014

8.50
120,000
0.22
8,000

6
120,000
0.22
48,000

Financial Ratios
Current ratio
Quick ratio
Inventories turnover
Average collection period
Fixed Assets Turnover
Total Assets Turnover
Debt ratio
Interest coverage
Profit margin
ROA
ROE
PER
MBR (Market to book ratio)

Industry Average
2.7
1
7
32
10.7
2.6
50%
2.5
3.50%
9.10%
18.20%
14.20%
1.40%

You are asked to structure your analysis so as to answer the following questions and to solve
the following tasks:
a) Define the short-term solvency in the context of financial analysis. What are the
values for the current and quick ratios for your company? Analyze its short-term
solvency.
b) What are the values for inventories turnover, fixed assets turnover, total assets
turnover, average collection period for the company? How is your company using its
assets compared with the other companies in the industry?
c) What are the values for debt ratio and interest coverage? Compare your company with
the industry it belongs to from the point of view of financial leverage. What are your
conclusions?
d) Calculate and analyze companys profitability ratios: profit margin, ROA, ROE.
e) Analyze market value ratios: PER and MBR.
f) Use the Du-Pont equation (ROA = Profit Margin x Total Assets Turnover) and the
extended Du-Pont equation (ROE = Profit Margin x Total Assets Turnover x Equity
Multiplier) to get a general view on your companys financial position and then
comment on its strengths and weaknesses.
g) Although the financial analysis offers us useful information about the operational and
financial state of a company, this analysis has its limits and problems which need
careful attention. Discuss the problems and limits that might appear in using financial
analysis in practice.