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Chapter 2: 9DQ (page 46)
What is free cash flow? Why is it important to leveraged buyouts?
The net balance of cash inflow and outflow is termed as the free cash flow, which can be used by an organization for investment purposes. It may reduce the requirement of borrowing from lenders and the borrowing cost.
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Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.
b. What is its return on stockholders’ equity?
All State Trucking Co. has the following ratios compared to its industry for last year:
Allstate trucking | Industry | |
Return on sales | 3% | 8% |
Return on assets | 15% | 10% |
Explain why the return-on-assets ratio is so much more favorable than thereturn-on-sales ratio compared to the industry. No numbers are necessary;a one-
sentence answer is all that is required.
Using the Du Pont method, evaluate the effects of the following relationships forthe Butters Corporation:
c. What would happen to return on equity if the debt-to-total-assets ratio
decreased to 35 percent?
Botox Facial Care had earnings after taxes of \(370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was \)31.50. In 20X2, earnings after taxes increased to \(436,000 with the same 200,000 shares outstanding. The stock price was \)42.00
a. Compute earnings per share and the P/E ratio for 20X1. The P/E ratio
equals the stock price divided by earnings per share.
b. Compute earnings per share and the P/E ratio for 20X2.
c. Give a general explanation of why the P/E ratio changed.
Using the income statement for Times Mirror and Glass Co., compute the following ratios:
The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.
d. Total assets turnover ratio.
Times mirror and glass company | |
Sales | \)126,000 |
Less: Cost of goods sold | 93,000 |
Gross profit | \(33,000 |
Less: selling and administrative expenses | 11,000 |
Lease Expenses | 4,000 |
Operating profit* | \)18,000 |
Less: Interest expenses | 3,000 |
Earning before taxes | \(15,000 |
Less: Taxes (30%) | 4,500 |
Earning after taxes | \)10,500 |
*equal income before interest and taxes
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