GF530 - Unit 4 Chpater 4 and 5 Assignment

Chapter 4: Question & Exercise 4.4 on page 308, 4.6 on page 308, 4.7 on page 308 and 4.18 on pages 312-313

4.4

Profit Margin for ROA versus ROCE. Describe the difference between the profit margin for ROA and the profit margin for ROCE. Explain why each profit margin is appropriate for measuring the rate of ROA and the rate of ROCE, respectively.

4.6

Advantages of Financial Leverage. A company president remarked, “The operations of our company are such that we can take advantage of only a minor amount of financial leverage.” Explain the likely reasoning the company president had in mind to support this statement.

4.7

Disadvantages of Financial Leverage. The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up their firm by borrowing and investing the funds in profitable assets.

4.18

Calculating and Interpreting Accounts Receivable and Inventory Turnover Ratios. Nucor and AK Steel are steel manufacturers. Nucor produces steel in mini-mills transform scrap ferrous metals into standard sizes of rolled steel, which Nucor then sells to steel service centers and distributors. Its steel falls on the lower end in terms of quality (strength and durability). AK Steel is an integrated steel producer, transforming ferrous metals into rolled steel and then into various steel products for the automobile, appliance, construction, and other industries. Its steel falls on the higher end in terms of quality. Exhibit 4.24 sets forth various data for these two companies for 2007 and 2008.

Required

a. Calculate the accounts receivable turnovers for Nucor and AK Steel for 2007 and 2008

b. Describe the likely reasons for the differences in the accounts receivable turnovers for these two firms.

c. Describe the likely reasons for the trend in the accounts receivable turnovers of these two firms during the two-year period

d. Describe the likely reasons for the differences in the inventory turnovers of these two firms.

e. Describe the likely reasons for the trend in the inventory turnovers of these two firms during the two-year period.

Exhibit 4.24

Selected Data for Nucor and AK Steel (amounts in millions)

?Chapter 5: Question & Exercise 5.3 on page 399, 5.10 on pages 400-401 and 5.12 on pages 401-402

5.3

Relation between Current Ratio and Quick Ratio. A firm has experienced a decrease in its current ratio but an increase in its quick ratio during the last three years. What is the likely explanation for these results?

5.10

Market Equity Beta in Relation to Systematic and Nonsystematic Risk. Market equity beta measures the covariability of a firm’s returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90 Nonsystematic risk is any source of risk that does not affect the covariability of a firm’s returns with the market. Some writes refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?

5.12

Calculating and interpreting Risk Ratios. Refer to the financial statement data for Hasbro in Problem 4.23 in Chapter 4. Exhibit 5.15 presents risk ratios for Hasbro for Year 2 and Year 3.

Required

a. Calculate the amounts of these ratios for Year 4.

b. Assess the changes in the short-term liquidity risk of Hasbro between Year 2 and Year 4 and the level of that risk at the end of Year 4.

c. Assess the changes in the long-term solvency risk of Hasbro between Year 2 and Year 4 and the level of that risk at the end of Year 4.

Exhibit 5.15