Assessing a Company's Earning Power
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The initial focus in DuPont Analysis is on component contributions to return-on-investment (ROI). In DuPont Analysis, ROI is defined as total asset turnover multiplied by net profit margin. Thus, ROI within this context is return on total assets (ROA). Within the context of this definition of ROI, the more sales that a company can generate for each dollar of resources applied in running the business, and/or the more profit a company earns on each dollar of sales, the greater will be the ROI. b. If we divide users of financial ratios into-short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and for what reasons. The DuPont Analysis system may be extended to assess ROE. ROE, within the context of the DuPont analysis, is defined as ROI divided by the quotient of total assets divided by shareholder equity. The ROE ratio would be of most interest to stock holders because this ratio reflects the assets accessible to stockholders. Long-term lenders will be more interested in ROI because this ratio is an indicator of the long-term viability of the company. Short-term lenders will be more interested in ROA because the combination of net profits and asset turnover provide an indication a companyÆs short-term liquidity. Cats and Dogs, Inc. sells one of its products for $8 per unit. In connection with that product, it has the following costs (not reproduced here). Separate the expenses between fixed and
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ke the discount because in doing so the company will come out $500 ahead.
d. If the banker requires a 20% compensating balance, how much must the firm borrow to end up with $300,000?
In such a scenario, the company needs to borrow $375,000 (300000= X * .8).
Question 4 Essay
The Mercury Corporation issued $100 par value preferred stock 10 years ago. The stock provided an 8% yield at the time of issue. The preferred stock is now selling for $75. What is the current yield or cost? (Disregard flotation costs)
Preferred stocks pay a fixed rate of return on par value. Thus, the annual dividend on the $100 Mercury preferred stock is $8. Ten years later, with a selling price of $75, an investorÆs yield would be 10.667% (8 /75) if the $100 par value stock was purchased for $75.
Question 5 Essay
Assume a corporation has earnings before depreciation and taxes of $100,000, and depreciation of $50,000, and it has a 30% tax bracket. Compute the cash flow using the format below (not reproduced here).
Earnings before depreciation and taxes: $100,000
Depreciation: 50,000
Earnings before taxes: $ 50,000
Taxes: 15,000
Earnings af
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Approximate Word count = 1329
Approximate Pages = 5 (250 words per page)
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