Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 3, Problem 3.21P

The relationship between financial leverage and profitability Pelican Paper Inc. and Timberland Forest Inc. are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms’ financial leverage and profitability.

Item Pelican Paper Timberland Forest
Total assets $10,000,000 $10,000,000
Total equity (all common) 9,000,000 5,000,000
Total debt 1,000,000 5,000,000
Annual interest 100,000 500,000
Total sales 25,000,000 25,000,000
EBIT 6,250,000 6,250,000
Earnings available for common stockholders 3,690,000 3,450,000
  1. a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other.
    1. 1. Debt ratio
    2. 2. Times interest earned ratio
  2. b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to one another.
    1. 1. Operating profit margin
    2. 2. Net profit margin
    3. 3. Return on total assets
    4. 4. Return on common equity
  3. c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland’s investors undertake when they choose to purchase its stock instead of Pelican’s?
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Students have asked these similar questions
DuPont system of analysis Use the following financial information for AT&T and Verizon to conduct a DuPont system of analysis for each company. AT&T Sales $164,000 Earnings available for common stockholders 13,333 Total assets 403,721 Stockholders' equity 124,210 a. Which company has the higher net profit margin? Higher asset turnover? b. Which company has the higher ROA? The higher ROE? c. Which company has the higher financial leverage multiplier? a. Net profit margin (Round to three decimal places.) AT&T Net profit margin Verizon C Verizon $131,868 13.708 244,180 24,032
Please use the financial ratios below to evaluate and each company’s performance relative to the other three companies in the industry. Please be more specific.     Net profit margin Total asset turnover Assets-to-Equity Ratio ROE Axel Co. 19% 1.53 3.4 98.8% Blue Co 6% 1.88 1.6 18.0% Carol Co. 10% 1.00 1.06 10.6% David Co. 4% 1.11 1.8 8.0%
You are given financial statements and a Dupont analysis for Tesco and Ahold. What do you conclude about the two companies’ performances based on these numbers?

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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License