ADMS 3595 Chapter Notes - Chapter 14: Cash Flow, Debt Service Coverage Ratio, Finance Lease

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ceruleanbutterfly567

23 Mar 2016

School

York University

Department

Administrative Studies

Course

ADMS 3595

Professor

Sung Kwon

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Document Summary

Loblaw versus empire (a) the following are the debt to total assets and times interest earned ratios for the companies: From the above analysis, it appears that loblaw has slightly more debt than empire in its capital structure. This results in its times interest earned ratio also being less than empire. However, empire has significant operating leases that would also need to be considered in preparing a full analysis. As can be seen from the above table, both companies use different ratios to measure their debt levels. Since these are non-gaap measures, there is some detail provided as to how these ratios have been calculated. 2013 and some capital lease obligations due 2011-2040. Empire had a credit rating of positive trend, which by the end of the year had been upgraded to stable. The primary reason driving this change was that the company had improved ebitda and also reduced interest expense, thereby improving its ebitda to interest ratio.

Related Questions

Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)

Assets			2010	2009
Cash and cash equivalents			$21,000	$20,000
Short-term investments			3,759	3,240
Accounts Receivable			52,500	48,000
Inventories			84,000	56,000
Total current assets			$161,259	$127,240
Net fixed assets			218,400	200,000
Total assets			$379,659	$327,240

Liabilities and equity
Accounts payable			$33,600	$32,000
Accruals			12,600	12,000
Notes payable			19,929	6,480
Total current liabilities			$66,129	$50,480
Long-term debt			67,662	58,320
Total liabilities			$133,791	$108,800
Common stock			183,793	178,440
Retained Earnings			62,075	40,000
Total common equity			$245,868	$218,440
Total liabilities and equity			$379,659	$327,240

Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
			2010	2009
Sales			$420,000	$400,000
Expenses excluding depr. and amort.			327,600	320,000
EBITDA			$92,400	$80,000
Depreciation and Amortization			19,660	18,000
EBIT			$72,740	$62,000
Interest Expense			5,740	4,460
EBT			$67,000	$57,540
Taxes (40%)			26,800	23,016
Net Income			$40,200	$34,524

Common dividends			$18,125	$17,262
Addition to retained earnings			$22,075	$17,262

Other Data			2010	2009
Year-end Stock Price			$90.00	$96.00
# of shares (Thousands)			4,052	4,000
Lease payment (Thousands of Dollars)			$20,000	$20,000
Sinking fund payment (Thousands of Dollars)			$0	$0

Ratio Analysis			2010	2009	Industry Avg
Liquidity Ratios
Current Ratio			2.38	2.52	2.58
Quick Ratio			1.17	1.41	1.53
Asset Management Ratios
Inventory Turnover			1.11	1.22	7.69
Days Sales Outstanding			45.63	43.80	47.45
Fixed Assets Turnover			1.92	2.00	2.04
Total Assets Turnover			3.81	5.64	1.23
Debt Management Ratios
Debt Ratio					32.1%
Times-interest-earned ratio					15.33
EBITDA coverage ratio					4.18
Profitability Ratios
Profit Margin			9.57%	8.63%	8.86%
Basic Earning Power			19.16%	18.95%	19.48%
Return on Assets			10.59%	10.55%	10.93%
Return on Equity			21.87%	19.35%	16.10%
Market Value Ratios
Earnings per share					NA
Price-to-earnings ratio					10.65
Cash flow per share					NA
Price-to-cash flow ratio					7.11
Book Value per share					NA
Market-to-book ratio					1.72

a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17

						b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.


						c. How has Joshua & White's profitability changed during the last year?


d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
	ROE =	PM x	TA Turnover x Equity Multiplier
2010
2009



						e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?

Common Size Balance Sheets
Assets			2010	2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets

Liabilities and equity			2010	2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity

Common Size Income Statements			2010	2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income



						f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?

Percent Change Balance Sheets				Base
Assets			2010	2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets

				Base
Liabilities and equity			2010	2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity

				Base
Percent Change Income Statements			2010	2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income

redyak732

Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)

Assets			2010	2009
Cash and cash equivalents			$21,000	$20,000
Short-term investments			3,759	3,240
Accounts Receivable			52,500	48,000
Inventories			84,000	56,000
Total current assets			$161,259	$127,240
Net fixed assets			218,400	200,000
Total assets			$379,659	$327,240

Liabilities and equity
Accounts payable			$33,600	$32,000
Accruals			12,600	12,000
Notes payable			19,929	6,480
Total current liabilities			$66,129	$50,480
Long-term debt			67,662	58,320
Total liabilities			$133,791	$108,800
Common stock			183,793	178,440
Retained Earnings			62,075	40,000
Total common equity			$245,868	$218,440
Total liabilities and equity			$379,659	$327,240

Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
			2010	2009
Sales			$420,000	$400,000
Expenses excluding depr. and amort.			327,600	320,000
EBITDA			$92,400	$80,000
Depreciation and Amortization			19,660	18,000
EBIT			$72,740	$62,000
Interest Expense			5,740	4,460
EBT			$67,000	$57,540
Taxes (40%)			26,800	23,016
Net Income			$40,200	$34,524

Common dividends			$18,125	$17,262
Addition to retained earnings			$22,075	$17,262

Other Data			2010	2009
Year-end Stock Price			$90.00	$96.00
# of shares (Thousands)			4,052	4,000
Lease payment (Thousands of Dollars)			$20,000	$20,000
Sinking fund payment (Thousands of Dollars)			$0	$0

Ratio Analysis			2010	2009	Industry Avg
Liquidity Ratios
Current Ratio			2.38	2.52	2.58
Quick Ratio			1.17	1.41	1.53
Asset Management Ratios
Inventory Turnover			1.11	1.22	7.69
Days Sales Outstanding			45.63	43.80	47.45
Fixed Assets Turnover			1.92	2.00	2.04
Total Assets Turnover			3.81	5.64	1.23
Debt Management Ratios
Debt Ratio					32.1%
Times-interest-earned ratio					15.33
EBITDA coverage ratio					4.18
Profitability Ratios
Profit Margin			9.57%	8.63%	8.86%
Basic Earning Power			19.16%	18.95%	19.48%
Return on Assets			10.59%	10.55%	10.93%
Return on Equity			21.87%	19.35%	16.10%
Market Value Ratios
Earnings per share					NA
Price-to-earnings ratio					10.65
Cash flow per share					NA
Price-to-cash flow ratio					7.11
Book Value per share					NA
Market-to-book ratio					1.72

a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17

						b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.


						c. How has Joshua & White's profitability changed during the last year?


d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
	ROE =	PM x	TA Turnover x Equity Multiplier
2010
2009



						e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?

Common Size Balance Sheets
Assets			2010	2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets

Liabilities and equity			2010	2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity

Common Size Income Statements			2010	2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income



						f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?

Percent Change Balance Sheets				Base
Assets			2010	2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets

				Base
Liabilities and equity			2010	2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity

				Base
Percent Change Income Statements			2010	2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income

redyak732

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

ADMS 3595 Chapter Notes - Chapter 14: Cash Flow, Debt Service Coverage Ratio, Finance Lease

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