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Firm B
Aseets Liablitiies and Equity
Cash $ 15 Account payable $ 37
Account receivable 72 Long term debt 200
Inventory 107
Property, plant, and equipment 289 Common equity 246
$483 $ 483
Firm A looks more risky than Firm B, because Firm A has long term debt investment that is
risky for the firm. If that investment doesn’t give firm return like they are expected, so tha firm
will gain loss.
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Project 11 / Ristafany Pahlevi / S 4310015
a) Analyze the risk drivers in these income statements. Which firm looks more risky for
stockholders ? why ?
ROCE Risk
Firm A Firm B
Profit margin = Income after tax / sales = $59 / $1,073 = $77 / $1,129
= 0.055 = 0.068
Expense risk = expense / sales = $955 / $1,073 = $1,005 / $1,129
= 0.89 = 0.26
Operating leverage risk = fixed cost / variable = $419 / $536 = $212 / $793
= 0.78 = 0.27
b) On the basis of the relationships in these income statements, develop pro forma income
statements under the following scenarios :
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Project 11 / Ristafany Pahlevi / S 4310015
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Project 11 / Ristafany Pahlevi / S 4310015
Logit analysis
Y = -1,32 – 0,407 + 6,03 (1,390/3,098) – 1,43 (976/3,098) + 0,0757 (1,390/976) –
2,37 ((423)/3,098) – 1,83 (976/1,390) – 0,285 (1) – 1,72 (1) – 0,521 ((269)/269)
= -1,32 – 0,407 + 2,7055 – 0,4505 + 0,1078 + 0,1365 – 1,285 – 0,285 – 1,72 +
0,521
= -1,9977
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Project 11 / Ristafany Pahlevi / S 4310015
E19.4 Z-Scoring
Below are ratio for some of the firms that have appeared in this book, for their 1998 fiscal year.
Firm Working Retained Earnings Market Value Sales /
Capital / Earnings / Before of Equity / Total
Total Assets Total Assets Interest and Book Value of Assets
Taxes / Liabilities
Total Assets
Coca-cola -0,12 1,05 0,29 15,4 0,98
Nike 0,34 0,58 0,15 9,0 1,67
Reebok 0,43 0,66 0,06 0,7 1,85
Hewlett- 0,24 0,50 0,13 3,6 1,40
Packard
Dell, Inc 0,38 0,09 0,31 27,9 2,65
Gateway 0,27 0,34 0,19 5,2 2,59
Computer
Microsoft 0,45 0,34 0,32 46,7 0,65
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Project 11 / Ristafany Pahlevi / S 4310015