Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 3, Problem 1DQ
If we divide users of ratios into short-term lenders, long-term lenders, and stockholders,
which ratios would each group be most interested in, and for what reasons? (LO3-2)
Expert Solution & Answer
Summary Introduction
Introduction: Ratios are used in our daily lives - from buying a car based on the average that it will provide to calculating the foul-shooting percentage in a baseball match. Ratios play a huge role in finance also. Financial ratios are used to calculate the operating performance of the company. Financial ratios can be divided into mainly four parts - profitability ratios, current ratios, asset utilization ratios, and debt utilization ratios.
Concept name: Shareholders, Short-term lenders, Long-term lenders which ratios they will be most interested in.
Answer to Problem 1DQ
Shareholders will be most interested in profitability and asset utilization ratios. Short-term lenders will be most interested in liquidity ratios and long-term lenders will be interested in debt-utilization ratio.
Explanation of Solution
The profitability ratios are used to calculate the capacity of the firm to generate returns on the total assets, sales, and capital invested. It basically gives an overview of the firm’s capability to employ its resources in an adequate manner. The shareholders are very keen to know the profitability ratio of the firm because it indicates the ability of the firm to generate returns. It can help shareholders have an overview of future growth. The liquidity ratios are used to calculate the firm’s ability to pay off short-term loans.
Short-term lenders are those that provide the firm with funds for a period of less than one year. These ratios will help short-term lenders analyze the firm’s liquidity and take a decision on whether to lend money or not. Debt-utilization ratios are used to calculate the firm’s debt. It helps long-term lenders analyze the firm’s ability to repay their long-term debt. This may help them invest accordingly in the firm.
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Dani Corporation has 3.4 million shares of common stock outstanding. The current share price is $84.50, and the book value per
share is $8.75. The company also has two bond issues outstanding. The first bond issue has a face value of $71 million, a coupon
rate of 5.1 percent, and sells for 95.5 percent of par. The second issue has a face value of $43 million, a coupon rate of 5.7 percent
and sells for 104.5 percent of par. The first issue matures in 21 years, the second in 9 years. The most recent dividend was $3.98 a
the dividend growth rate is 4.1 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent.
What is the company's cost of equity?
Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
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%
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Chapter 3 Solutions
Foundations of Financial Management
Ch. 3 - If we divide users of ratios into short-term...Ch. 3 - Explain how the Du Pont system of analysis breaks...Ch. 3 - If the accounts receivable turnover ratio is...Ch. 3 - Prob. 4DQCh. 3 - Is there any validity in rule-of-thumb ratios for...Ch. 3 - Why is trend analysis helpful in analyzing ratios?...Ch. 3 - Inflation can have significant effects on income...Ch. 3 - What effect will disinflation following a highly...Ch. 3 - Why might disinflation prove favorable to...Ch. 3 - Comparisons of income can be very difficult for...
Ch. 3 - Low Carb Diet Supplement Inc. has two divisions....Ch. 3 - Database Systems is considering expansion into a...Ch. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - Prob. 5PCh. 3 - Dr. Zhivà€go Diagnostics Corp.’s income...Ch. 3 - The Haines Corp. shows the following financial...Ch. 3 - Easter Egg and Poultry Company has $2,000,000 in...Ch. 3 - Prob. 9PCh. 3 - Prob. 10PCh. 3 - Baker Oats had an asset turnover of 1.6 times per...Ch. 3 - AllState Trucking Co. has the following ratios...Ch. 3 - Front Beam Lighting Company has the following...Ch. 3 - Prob. 14PCh. 3 - Prob. 15PCh. 3 - Jerry Rice and Grain Stores has $4,780,000 in...Ch. 3 - Prob. 17PCh. 3 - Prob. 18PCh. 3 - Prob. 19PCh. 3 - Prob. 20PCh. 3 - Jim Short’s Company makes clothing for schools....Ch. 3 - The balance sheet for Stud Clothiers is shown...Ch. 3 - The Lancaster Corporation’s income statement is...Ch. 3 - Prob. 24PCh. 3 - Prob. 25PCh. 3 - Prob. 26PCh. 3 - Prob. 27PCh. 3 - Prob. 28PCh. 3 - The Global Products Corporation has three...Ch. 3 - Prob. 30PCh. 3 - Prob. 31PCh. 3 - Prob. 32PCh. 3 - Prob. 33PCh. 3 - Prob. 34PCh. 3 - The following information is from Harrelson...Ch. 3 - Using the financial statements for the Snider...Ch. 3 - Given the financial statements for Jones...
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