Debt Management and Short-Term
Magellan Company is an international travel agency providing travel planning services to customers in over 20 Countries. Recently, the travel industry has been experiencing volatility as a result of increases in oil prices. Magellan’s investors have been following its financial information closely to determine its ability to continue as a going concern, Its investors have used the following information to determine financial ratios:
Required:
Between 20l8 and 20l9, indicate whether Magellan’s debt to equity ratio increased or decreased. Also, indicate whether Magellan’s
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Chapter 12 Solutions
Cornerstones of Financial Accounting
- RATIO ANALYSIS The Corrigan Corporation’s 2017 and 2018 financial statements follow,along with some industry average ratios.a. Assess Corrigan’s liquidity position, and determine how it compares with peers andhow the liquidity position has changed over time.b. Assess Corrigan’s asset management position, and determine how it compares withpeers and how its asset management efficiency has changed over time.c. Assess Corrigan’s debt management position, and determine how it compares withpeers and how its debt management has changed over time.d. Assess Corrigan’s profitability ratios, and determine how they compare with peersand how its profitability position has changed over time.e. Assess Corrigan’s market value ratios, and determine how its valuation compares withpeers and how it has changed over time. Assume the firm’s debt is priced at par, sothe market value of its debt equals its book value. f. Calculate Corrigan’s ROE as well as the industry average ROE, using the DuPontequation.…arrow_forwardRATIO ANALYSIS The Corrigan Corporation's 2017 and 2018 financialstatements follow, along with some industry average ratios.a. Assess Corrigan's liquidity position, and determine how itcompares with peers and how the liquidity position has changedover time.b. Assess Corrigan's asset management position, and determinehow it compares with peers and how its asset managementefficiency has changed over time.c. Assess Corrigan's debt management position, and determinehow it compares with peers and how its debt management haschanged over time.d. Assess Corrigan's profitability ratios, and determine how theycompare with peers and how its profitability position has changedover time.e. Assess Corrigan's market value ration, and determine how itsvaluation compares with peers and how it has changed over time.Assume the firm's debt is priced at par, so the market value of itsdebt equals its book value. f. Calculate Corrigan's ROE as well as the industry average ROE,using this DuPont equation. From…arrow_forwardIf given the opportunity, in which of the firms would you invest based on the result of your analysis of both companies and the comparison with the industry? If you would not invest, explain your reasons according to the results obtained. Company Name: Year 2018 Chemicals and Allied Products Industry Ratios ………….. Solvency or Debt Ratios Merck J&J 2018 Debt ratio 0.67 0.61 0.47 Debt-to-equity ratio 0.93 0.51 0.38 Interest coverage ratio 12.27 18.91 -9.43 Liquidity Ratios Current ratio 1.17 1.47 3.47 Quick ratio 0.92 1.16 2.12 Cash ratio 0.40 0.63 2.24 Profitability Ratios Profit margin 14.64% 18.75% -93.4% ROE (Return on equity), after tax 23.03% 25.60% -248.5 ROA (Return on assets) 7.49% 10.00% -146.5 Gross margin 68.06% 66.79% 55.3% Operating margin (Return on sales) 19.62% 24.27%…arrow_forward
- 1) If debts to equity ratio equal to 100% so, debts to assets ratio equal? A)50% B) 150% C) 75% 2) increasing in global. oil pricing for Jordanian industrial corporations is considered: A) opportunity B) threats C) weakness D) strength 3) the correct arrangement for the following analysis is A) financial analysis, accounting analysis, prospective analysis B) financial analysis, prospective analysis, accounting analysis C) accounting analysis, financial analysis, prospective analysis D) prospective analysis, accounting analysis, financial analysis.arrow_forwardA firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Less depreciation Days sales outstandinga aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) $78 Accounts payable Other current liabilities Net fixed assets Total assets Gross profit Selling expenses EBITDA 2x 15% 5x 10x 9x 25days Taxes (25%) Net income 74 147 $299 216 55 $161 $460 Depreciation expense Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Fixed assets turnover…arrow_forwardThe DuPont equation shows the relationships among asset management, debt management, and ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is: Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. factors also need to be considered. Quantitative Problem: Rosnan Industries' 2022 and 2021 balance sheets and income statements are shown below. Balance Sheets 2022 2021 Assets Cash and equivalents $ 70 $ 55 Accounts receivable 275 300 Inventories 375 350 Total current assets $ 720 $ 705 Net plant and equipment 2,000 1,490 Total assets $ 2,720 $ 2,195 Liabilities and Equity Accounts payable $ 150 $ 85 Accruals 75 50…arrow_forward
- Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures computer hardware and offers related technology services. Target operates a chain of general merchandise discount retail stores. The data in the following table apply to these companies (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value. REQUIRED a. Assume that the intermediate-term yields on U.S. government Treasury securities are 3.5%. Assume that the market risk premium is 5.0%. Compute the cost of equity capital for each of the three companies. b. Compute the weighted-average cost of capital for each of the three companies. c. Compute the unlevered market (asset) beta for each of the three companies. d. Assume that each company is a candidate for a potential leveraged buyout. The buyers intend to implement a capital structure that has 75% debt (with a pretax borrowing cost of 8.0%) and 25% common equity. Project the weighted-average cost of capital for each company based on the new capital structure. To what extent do these revised weighted-average costs of capital differ from those computed in Requirement b?arrow_forwardRATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. Thefirm’s debt is priced at par, so the market value of its debt equals its book value. Since dollarsare in thousands, number of shares are shown in thousands too.a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline Barry’s strengths and weaknesses as revealed by your analysis.d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, andcommon equity during 2018. How would that information affect the validity of yourratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios ifaverages are not used. No calculations are needed.)arrow_forwardAnalyze the trends and factors that determine Astro Berhad Malaysia in 2022 that need for the debt financing instead of equity financing due to high debt to equity ratio by relating to the following points. Debt Level: ASTRO's net debt to equity ratio (90.1%) is considered high. Reducing Debt: ASTRO's debt to equity ratio has reduced from 426.8% to 152.6% over the past 5 years. Debt Coverage: ASTRO's debt is well covered by operating cash flow (75%). Interest Coverage: ASTRO's interest payments on its debt are well covered by EBIT (5.2x coverage).arrow_forward
- based on the ratios what can you say about the company's liquidity? Is it liquid enough to convert its asset in to cash immediately or within one year?arrow_forwardQuestion A According to an international survey of CFOs of publicly traded firms, which of the following was NOT considered to be an important factor in determining the optimal amounts of debt in a firm's capital structure? A) Credit ratings B) Corporate tax shield C) Financial distress cost D) All of the above were considered to be important. Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this linearrow_forwardA firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Days sales outstandinga aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) $78 Accounts payable 74 147 $299 Less depreciation Industry Average Ratios Net fixed assets. Total assets 2x 15% 5x 10x 9x 25days Fixed assets turnover Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital 216 55 $161 $460 Other current liabilities Notes payable Total current liabilities Long-term debt Total…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning