Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Textbook Question
Chapter 13, Problem 13.4ME
Computing the Financial Leverage Percentage
Compute the financial leverage percentage for Year 2 given the following data:
| Year 2 | Year 1 | |
| Return on equity | 21.00% | 26.00% |
| Return on assets | 6.00 | 8.00 |
| Profit margin | 12.00 | 12.00 |
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Students have asked these similar questions
a. Perform a Du Pont analysis on Green Valley. Assume that the
industry average ratios are as follows:
Total margin
3.5%
Total asset turnover
1.5
Equity multiplier
2.5
Return on equity (ROE)
13.1%
b. Calculate and interpret the following ratios:
Industry Average
Return on assets (ROA)
Current ratio
5.2%
2.0
Days cash on hand
22 days
Average collection period
19 days
Debt ratio
71%
Debt-to-equity ratio
2.5
Times interest earned (TIE) ratio
2.6
Fixed asset turnover ratio
1.4
c. Assume that there are 10,000 shares of Green Valley's stock
outstanding and that some recently sold for $45 per share.
• What is the firm's price/earnings ratio?
What is its market/book ratio?
(Hint: These ratios are discussed in the supplement to this
chapter.)
Assignment 1: Financial Statement Analysis and Interpretation of the Results
• Select two different corporations (from the same industry) publicly traded in the US Stock
Exchange Markets. (NYSE, NASDAQ)
o Make sure the companies you select are traded in same currency (USD, Euro, GBP)
o Please get the approval for the names of the firm before you start your work.
• The analysis of same company by different students will not be graded
• Download the necessary financial statements for the companies for 2021 and 2020
o For data collection you can use: finance.yahoo.com or finance.google.com
Part 1: Apply the financial analysis for the last two years using ratios covered in Chapter 3.
Use excel formulas for calculation of the ratios on a separate sheet (manual calculations will not be graded!)
You are not responsible for Part 5 (V. Market Value) ratios
Some companies may not have all the data due to their variations in industries.
If you face missing data just skip that ratio (mention as…
Analyze the following ratios (Good/Not good, Undervalued/Overvalued, or just OK) based on the given industry averages.
Ratios
Annual Data
Industry Average
Interpretation
Current
5.7
4
Days Sales Outstanding
37 days
42 days
Total Debt to Total Capital
47.80%
32.60%
Times-Interest Earned
2.2
6
Profit Margin
6.10%
6.00%
Return on Invested Capital
10.03%
10.00%
Enterprise Value to EBITDA
0.87
1.12
Provide a decision for each analysis.
Chapter 13 Solutions
Financial Accounting
Ch. 13 - Who are the primary users of financial statements?Ch. 13 - When considering an investment in stock, investors...Ch. 13 - How does product differentiation differ from cost...Ch. 13 - What are the two general methods for making...Ch. 13 - What are component percentages? Why are they...Ch. 13 - What is ratio analysis? Why is it useful?Ch. 13 - What do profitability ratios focus on? What is an...Ch. 13 - What do turnover ratios focus on? What is an...Ch. 13 - What do liquidity ratios focus on? What is an...Ch. 13 - What do solvency ratios focus on? What is an...
Ch. 13 - What do market ratios focus on? What is an example...Ch. 13 - Prob. 12QCh. 13 - Explain why rapid growth in total sales might not...Ch. 13 - A company has total assets of 500,000 and...Ch. 13 - Prob. 2MCQCh. 13 - Prob. 3MCQCh. 13 - Prob. 4MCQCh. 13 - Prob. 5MCQCh. 13 - Prob. 6MCQCh. 13 - Prob. 7MCQCh. 13 - Prob. 8MCQCh. 13 - Prob. 9MCQCh. 13 - Prob. 10MCQCh. 13 - Prob. 13.1MECh. 13 - Prob. 13.2MECh. 13 - Prob. 13.3MECh. 13 - Computing the Financial Leverage Percentage...Ch. 13 - Analyzing the Inventory Turnover Ratio A...Ch. 13 - Prob. 13.6MECh. 13 - Prob. 13.7MECh. 13 - Prob. 13.8MECh. 13 - Prob. 13.9MECh. 13 - Prob. 13.10MECh. 13 - Using Financial Information to Identify Companies...Ch. 13 - Prob. 13.2ECh. 13 - Prob. 13.3ECh. 13 - Prob. 13.4ECh. 13 - Prob. 13.5ECh. 13 - Prob. 13.6ECh. 13 - Prob. 13.7ECh. 13 - Prob. 13.8ECh. 13 - Prob. 13.9ECh. 13 - Prob. 13.10ECh. 13 - Inferring Financial Information from Ratios E13-11...Ch. 13 - Prob. 13.12ECh. 13 - Prob. 13.13ECh. 13 - Prob. 13.1PCh. 13 - Prob. 13.2PCh. 13 - Prob. 13.3PCh. 13 - Prob. 13.4PCh. 13 - Prob. 13.5PCh. 13 - Computing Comparative Financial Statements and...Ch. 13 - Analyzing Financial Statements Using Ratios Use...Ch. 13 - Prob. 13.8PCh. 13 - Prob. 13.9PCh. 13 - Prob. 13.1APCh. 13 - Prob. 13.2APCh. 13 - Calculating Profitability, Turnover, Liquidity,...Ch. 13 - Prob. 13.4APCh. 13 - Prob. 13.5APCh. 13 - Prob. 13.6APCh. 13 - Prob. 13.1CPCh. 13 - Prob. 13.2CPCh. 13 - Comparing Companies within an Industry Refer to...Ch. 13 - Prob. 13.4CPCh. 13 - Inferring Information from the DuPont Model Ratios...Ch. 13 - Prob. 13.6CP
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- ANALY SIS OF LEVERAGE Based on the financial statement data in Exercise 24-1A, compute the following leverage measures for 20-2 (round all calculations to two decimal places): (a) Debt-to-equity ratio (b) Times interest earned ratio (Bond interest is 24,200.) (c) Assets-to-equity ratioarrow_forwardFinancial leverage MicrosoCortrepotied (MSFT) reported the following data (in millions) for a tern year Compute the profit margin, asset turnover, and financial leverage metrics using the expandedDuPont formula. Round profit margin, asset turnover, and financial leverage to two decimalplaces.Round return on stockholders’ equity to one decimal place.arrow_forwardThe income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.arrow_forward
- Based on the given information calculate financial leverage. Net worth rs 25,00,000 debt/equity 3:1 intreset rate 12% operating profit rs.2,00,000 a.2.43 b.2.16 c.1.82 d.2.11arrow_forwardConsider the table given below to answer the following question. Asset value Earnings Year Net investment Free cash flow Return on equity Asset growth rate Earnings growth rate Present value 1 12.00 1.44 1.44 0.00 0.12 0.12 2 13.44 1.61 1.61 0.00 0.12 0.12 0.12 million 3 15.05 1.81 1.81 0.00 0.12 0.12 0.12 4 16.86 2.02 1.52 0.51 0.12 0.09 0.12 5 18.38 2.21 1.65 0.55 0.12 0.09 0.09 6 20.03 2.30 1.80 0.50 0.115 0.09 0.04 7 21.83 2.40 1.31 1.09 0.11 0.06 0.04 8 23.14 2.43 1.39 1.04 0.105 0.06 0.01 9 24.53 1.96 1.47 0.49 0.08 0.06 -0.19 Assuming that competition drives down profitability (on existing assets as well as new investment) to 11.5% in year 6, 11% in year 7, 10.5% in year 8, and 8% in year 9 and all later years. What is the value of the concatenator business? Assume 10% cost of capital. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. 10 26.00 2.08 1.56 0.52 0.08 0.06 0.06arrow_forwardposted in account answer pleaseearrow_forward
- Q2. Given: Revenues/Total assets 13.5% Return on assets (ROA) 1.72% Return on equity (ROE) 18.20% Calculate Community Bank’s leverage multiplier and profit marginarrow_forwardWhat company is better in short term investment?arrow_forwardQUESTION 17 A company has a Return on Equity of 0.39, a Profit Margin of 0.2 and Total Asset Tumover of 0.55. Using this information calculate the Equity Multiplier?arrow_forward
- What is the return on equity?arrow_forwardQUESTION 6 A company has a Return on Equity of 0.2, a Profit Margin of 0.12 and Total Asset Turnover of 0.48. Using this information calculate the Equity Multiplier?arrow_forwardassuming the following ratios are constant, what is the growth rate? Total asset turnover 1.7 Profit margin0.072 Total assets/Equity = 2.15 Payout ratio0.42arrow_forward
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