FIN - Financial Analysis Problems

Financial Analysis Problems

1. A firm has the following ratios: ROE=25% (return on equity), ACP=37 days (average collection period), PM=5% (profit margin), CR=2.4 (current ratio), ATO=2.2 (asset turnover), and DSI=92 days (days of sales in inventory). Find the firm’s debt-to-asset (D/A) ratio.

2. a) If the equity multiplier of a company is 3, what is its D/A ratio and its D/E ratio?

b) If the D/A ratio of a company is 60%, what is its EM ratio and its D/E ratio?

c) If the D/E ratio of a company is 1.5, what is its EM ratio and its D/A ratio?

3. A firm has current assets of $560,000 and current liabilities of $200,000. This firm has decided to change its current ratio to 2.0. To do so, it will change the level of its short-term loans by $X and make a corresponding change in its cash account by that same amount. Find the value of $X needed to achieve the firm’s goal. You must

provide an analytical solution.

4. Canes Bank pays its depositors 3% p.a. on their savings accounts, and charges 5% on its loans to borrowers. The only source of revenue for the bank is from its loan portfolio, which is 60% of its total assets of $3 billion. What is this bank’s asset turnover?

5. Some people argue that the DuPont relationship implies that firms should use as much leverage as possible because, other things being equal, as debt increases so does the equity multiplier (EM) and, therefore, the ROE also increases. However, in practice this is not necessarily true. Why not? Be specific and brief.

6. Using the numbers given below for Yippie.com, graphically analyze the various contributions to the increase in accounts receivable (A/R) that the company experienced between year 0 and year 1. In particular, find and graph the numerical increases in A/R over that 1-year period for which the sales and credit managers are

responsible.

a) Yr 0 Yr 1

A/R $400 $600

Sales/yr $6,000 $4,000

b) Yr 0 Yr 1

A/R $600 $400

Sales/yr $4,000 $6,000

c) Yr 0 Yr 1

A/R $600 $800

Sales/yr $4,000 $5,000