Assessing a Company's Earning Power

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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