AFM291 Lecture Notes - Lecture 7: Credit Risk, Retained Earnings, Book Value
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FSU Manufacturing, Inc. has the following financial statements data for 2014:
Income Statement | Balance Sheet | |||
Sales | $102,500 | Cash | $40,000 | |
Cost of Goods | $50,000 | Fixed Assets | $55,000 | |
SG&E Expenses | $35,000 | Total Assets | $95,000 | |
EBIT | $17,500 | Accounts Payable | $12,000 | |
Interest Expense | $2,500 | Long-term Debt | $25,000 | |
Taxes | $6,000 | Retained Earnings | $28,000 | |
Net Income | $9,000 | Paid-in Common Equity | $30,000 |
Trait 1 | Use of financial statements | ||
1. | |||
a. | Compute the firmâs debt ratio and current ratio. | ||
b. | Is the firm profitable? Does the balance sheet balance? Explain. | ||
c. | If the firm paid $5,000 in dividends in 2014, what was its retained earnings balance at the end of 2013? (20 points) | ||
Trait 2 | Student relates financial ratios to improved business decisions | ||
2. | |||
a. | Compute the firmâs net profit margin, total asset turnover, and financial leverage multiplier (also known as the equity multiplier). | ||
b. | Explain what each of the three ratios above tells you about the firmâs performance and how they combine to form the firmâs return on equity. | ||
c. | The financial data for the firmâs major competitors show on average a net profit margin of 16%, total asset turnover of 1.25, but comparable leverage. Identify some possible business decisions that the firm could make so that it would be as attractive an investment as its competitors. |
Your friend, Liz, loves to shop at Target and is now interested in investing in the company. Tom, another friend, has told her that Targetâs debt structure is risky with obligations of nearly 74% of total assets. Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tomâs comment. Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky. Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion.
At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):
Current liabilities | $11,782 |
Long-term debt | 15,126 |
Other liabilities | 2,345 |
Total assets | 44,560 |
Target reported the following information on leases in the notes to the financial statements:
Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.
Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:
Future Minimum Lease Payments (in Millions) | Operating Leases | Capital Leases |
2008 | $ 239 | $ 12 |
2009 | 187 | 16 |
2010 | 173 | 16 |
2011 | 129 | 16 |
2010 | 123 | 17 |
After 2010 | 2, 843 | 155 |
Total future minimum lease payments | $3694 (a) | $232 |
Less: Interest (b) | (105) | |
Present value of minimum capital lease payments | $127 (c) |
a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.