Financial Analysis

Name：Khawla hammouri

Student ID：21179810

1．

1-1What are the current ratios for 2014 and 2015? Why is it changed between 2 years?
Answer:
2015 2014 change
Current ratio 1,60 1,65 -3,03%

We can observe that the current ratio has decreased to 1,60 in 2015 from 1,65 in 2014, because the current liabilities
has increased and also the current assets has increased.

1-2What are the days' sales in inventory for 2014 and 2015? (Use ending inventory) Why is it changed between 2
years?
Answer:
2015 2014 change
The days sales in 66,97 65,76 1,84%
inventory
DSI increased from 65,76 to 66,97 , which means that the firm may have invested too much in inventory

1-3What are the cash coverage ratios for 2014 and 2015? Why is it changed between 2 years?
Answer:
2015 2014
The cash coverage ratios 2,563 0,029
0,0353

What are the values for the three components of the DuPont identity for 2014 and 2015? Why is it changed between 2
years?
Answer:
ROE=PM*TAT*EM
=(Netincome/Sales)*(Sales/TA)*(TA/E)
2014 2015
Net income 94,000 94,000
Sales 848,600 848,600
Total Assets 902,000 913,600
Total Equity 428,300 489,100
NI/Sales 0,11 0,11
Sales/TA 0,94 0,92
TA/TE 2,10 1,86
ROE 0,2171 0,1882
21,71% 18,82%

1-4Deep Falls Timber stock sold for $6.50 a share as of 2015. What was the price-earnings ratio at that time?
Answer:
Calculation for Price earnings ratio:

Price earnings ratio=Price per share / Earnings per share

Price earnings ratio= $6.50 / ($94,000/170,000)

Price earnings ratio= $6.50 / 0.55294118
Price earnings ratio= 11.81
Therefore the Price earnings ratio at that time will be 11,81

1-5Deep Falls Timber stock sold for $6.50 a share as of 2015. What was the market-to-book ratio at that time?
Answer:
 market-to-book ratio=market value per share/book value per share
book value per share = TE/total share of common stock
= 489100/170000=2,87
Market-to-book ratio =6,50/2,87
=2,26

2. New Tek has a sustainable growth rate of 11.2 percent. However, the firm’s managers are determined that the firm
should grow by at least 20 percent next year. What must the firm do if the managers are to reach their desired level of
growth for the firm?
Answer:
Understanding the implications of both the internal and sustainable growth rates can help management know when
to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that
growth. For the firm to achieve growth beyond the sustainable rate, the firm must increase its debt-equity ratio,
obtain additional external equity financing, reduce its dividends, improve its profitability, or some combination of
these actions.

3. A retail store has days' sales in inventory of 68 days and an average collection period of 32 days. The firm pays
its suppliers in an average of 42 days, on average. Taken together, what do these average values imply about the firm's
operations and its cash flows?
Answer:
It takes a total of 100 days (= 68 + 32) to sell inventory and collect payment on the sale of that inventory. Meanwhile,
42 days after acquiring the inventory and prior to the inventory even being sold, the retailer must pay its suppliers.
So ,the firm must pay out cash 58 (= 100 - 42) days prior to receiving payment.
This creates a negative cash flow which the firm must be able to finance.

4. Which is a more meaningful measure of profitability for a firm, return on assets or return on equity? Why?
Answer:
All would contend ROE since it measures returns relative to the sum shareholders have contributed within the firm. In
expansion, since shareholder wealth maximization could be a firm's essential objective, it makes more sense to see at
this measure.

5. You are comparing the common-size financial statements for two firms in the same industry that have very
similar operations. You note that their sales revenues are similar in dollar value but yet the common-size EBIT for one
firm is 30 percent compared to only 26 percent for the other firm. What are some possible explanations for this
difference given the strong similarities of the two firms?
Answer:
Some possible explanations are:
(1) difference in the age of the fixed assets leading to differences in the depreciation expense
(2) different depreciation methods,
(3) different inventory methods which affects the cost of goods sold,
(4) different sales markets that allows the one firm to have a higher markup per item and thus a higher selling price
per unit,
(5) different markets that causes higher costs per unit produced for one firm,
(6) Differing fiscal years.