FINE 2000 Lecture Notes - Lecture 3: Economic Value Added, Deferred Tax, Earnings Before Interest And Taxes

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coffeemarten199

15 Mar 2016

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Market capitalizaion: total market value of equity/irm"s shares. Mc = share price x # shares outstanding. Funds invested by shareholders when they purchase shares of that company + earnings reinvested by the company on behalf of the shareholders. Measures equity atributable to shareholders/equity holders (excl. non- controlling/minority interest if it is on the inancials) The diference that is let when comparing how much shares/money shareholders contributed and what they ended up with in terms of shares/money. Market capitalizaion book value of equity. Value added for each dollar that shareholders invested. Raio of market value to book value of equity. Market value relects future expectaions about performance, not so much current concrete facts. Market values for private companies without publicly traded shares and companies that are 100% owned by other companies can not be found. Economic value added and accouning rates of return. Operaing proit cost of capital employed.

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1. Use the attached balance sheet and income statement to compute the required financial ratios for 2012. Use 360 for the number of days in a year. The computations for 2011 are already done for you.

Current ratio_________________________

Quick ratio__________________________

Inventor turnover____________________

Average Collection Period_____________

Total asset turnover__________________

Net profit margin____________________

Operating profit margin_______________

Times Interest Earned_________________

Debt/Net Worth Ratio_________________

Return on Equity ratio__________________

2. Using the computed financial ratios from question 1, compare Grounds Keeperâs performance from 2011 to 2012. Address what areas the company has improved and what areas it has not

A.)Liquidity

B.) Activity / turnover / efficiency

C.) Profitability

D.) Leverage / use of debt / solvency

3. If you were the CEO of Grounds Keeper, what area(s) would you concentrate on to improve the performance of the company?

4. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.

5. Determine Grounds Keeperâs capital structure and working capital.

6. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.

7. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?

8. Explain what Grounds Keeper should consider when deciding whether to issue stocks or bonds? Answer using at least 3 different characteristics comparing and contrasting stocks and bonds.

9. Define money market instruments; list at least one type of security that would be considered a money market instrument. What are the advantages to Grounds Keeper in using money market instruments as financing? What are the disadvantages?

	Grounds Keeper
	Consolidated Balance Sheets
	(Dollars in thousands)
	2012	2011
Assets
Current assets:
Cash and cash equivalents	78,240	44,395
Receivables	399,891	340,062
Inventories	844,737	736,677
Total current assets	1,322,868	1,121,133

Fixed assets, net	1,244,384	889,613
Other long-term assets	1,048,537	1,187,141
Total assets	3,615,789	3,197,887

Liabilities and Stockholdersâ Equity
Current liabilities:
Accounts payable	309,222	319,465
Accruals	201,017	145,240
Notes payable	9,748	6,669
Total current liabilities	519987	471374
Long-term debt	834574	814298
Total liabilities	1,354,561	1,285,672
Stockholdersâ equity:
Common stock, $0.10 par value:	15,268	15,447
Additional paid-in capital	1,464,560	1,499,616
Retained earnings	781400	397152
Total stockholdersâ equity	2,261,228	1,912,215
Total liabilities and stockholdersâ equity	3,615,789	3,197,887

Grounds Keeper

Consolidated Statements of Operations

(Dollars in thousands except per share data)

2012

2011

Net sales

3,889,426

2,642,390

Cost of sales

2,589,799

1,746,274

Gross profit

1,299,627

896,116

Selling and operating expenses

481,493

348,696

General and administrative expenses

219,010

187,016

Operating income

599,124

360,404

Interest expense

22,983

57,657

Income before income taxes

576,141

302,747

Income tax expense

212,641

101,699

Net Income

363,500

201,048

Basic income per share:

Average shares outstanding

154,933,948

146,214,860

Earnings per common share

2.35

1.38

Current Ratio	Current assets/ Current liabilities
Quick Ratio	Current assets â inventory/ Current liabilities
Inventory Turnover	Cost of goods sold/ Inventory
Receivables Turnover	Sales/ Accounts receivables
Average Collection Period	Receivables/ Sales per day
Fixed Asset Turnover	Sales/ Fixed assets
Total Asset Turnover	Sales/ Total Assets
Gross Profit Margin	Revenues - Cost of goods sold/ Sales
Operating Profit Margin	Earnings before interest and taxes/ Sales
Net Profit Margin	Net income/ Sales
Return on Total Assets	Net income/ Total assets
Debt/Net Worth Ratio	Total Debt/ Total Equity
Times-Interest-Earned	Operating Income/ Interest expense
Return on Equity	Net income/ Total equity

magentalouse290

I need proof reading help with my assignment please. Due tonight. Thank you.

Gross Margin shows what a company retains after incurring the direct costs associated with producing the goods and services sold. EBayâs gross margin shows they are more efficient than Amazon. Amazon has a larger cost than eBay. Amazon may sell more than eBay, but due to their cost their gross margins are far less than eBayâs. When considering gross margin for an investment opportunity it shows eBay is safer than Amazon for an investment.

After operating margin analysis we can say that eBay has a larger amount of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. In this case eBay will have some revenue left over after paying debt, interest, or other payments.

It goes without saying that most investors pay very close attention to a companyâs Net Profit Margin before they invest their money into a company or a project. Thatâs why after reviewing the Net Profit Margin of both eBay and Amazon, I would suggest investing in eBay, since they are a more profitable company than Amazon.

Interest coverage ratio arises because how effortlessly a company can pay interest on outstanding debt. In this case eBay makes their place safe since they donât have to pay any interest. On the other hand, Amazon has 12.59. In consideration of interest coverage ration it is also could be a good investment.

Market to book ratio is significant to financiers to comprehend how much are they paying for each dollar in net assets. Here Iâve calculated the total book value of its assets and its current market value. Thatâs why I can say that they have enough assets for both them to be strong in future.

ROE is expressed as the amount of net income returned as a percentage of shareholders equity. When an investor decided to finance in some company or project, he also chooses how much he will get back in the future because of their risk taking. In this case it would be more suitable for the financier to invest their money into eBay based on their return.

When somebody is getting ready to invest theyâre always attempting to know where their money goes or is their money appropriately being used? Its gives them a sense of how well a company is using its money to generate returns. Thatâs why its help investors to understand efficiency of allocating the capital under its control to make profitable investments. Since no dividends were declared their efficiency results are the same as their ROE.

In this breakdown we can see that both companies are worthwhile in related to its assets. Though further scrutiny into the figures will show the eBay is more efficient in using its assets to generate earnings. For investment perspectives eBay is the safer place to invest your money.

After all analysis we see Amazon has by far larger sales, but their profit margins are less than eBayâs this is due to their cost being too high. Though eBay may have smaller number of sales they have better profits than Amazon. This is all due to their cost efficiency and well-managed activities. As far as asset turnover Amazon did get the best of eBay, but in the end, after all my analysis I would consider eBay the better option for investment.

FINE 2000 Lecture Notes - Lecture 3: Economic Value Added, Deferred Tax, Earnings Before Interest And Taxes

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