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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Textbook Question
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 |
- 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. Debt ratio
- 2. Times interest earned ratio
- b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to one another.
- 1. Operating profit margin
- 2. Net profit margin
- 3.
Return on total assets - 4.
Return on common equity
- 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
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David Co.
4%
1.11
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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?
Chapter 3 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 3.1 - Prob. 1FOECh. 3.1 - Prob. 2FOECh. 3.1 - Prob. 3.1RQCh. 3.1 - Describe the purpose of each of the four major...Ch. 3.1 - Prob. 3.3RQCh. 3.1 - Prob. 3.4RQCh. 3.2 - With regard to financial ratio analysis, how do...Ch. 3.2 - What is the difference between cross-sectional and...Ch. 3.2 - Prob. 3.7RQCh. 3.2 - Prob. 3.8RQ
Ch. 3.3 - Under what circumstances would the current ratio...Ch. 3.3 - In Table 3.5, most of the specific firms listed...Ch. 3.4 - To assess the firms average collection period and...Ch. 3.5 - What is financial leverage?Ch. 3.5 - What ratio measures the firms degree of...Ch. 3.6 - What three ratios of profitability appear on a...Ch. 3.6 - Prob. 3.15RQCh. 3.6 - Prob. 3.16RQCh. 3.7 - Prob. 3.17RQCh. 3.8 - Financial ratio analysis is often divided into...Ch. 3.8 - Prob. 3.19RQCh. 3.8 - What three areas of analysis are combined in the...Ch. 3 - Prob. 1ORCh. 3 - Learning Goals 3, 4, 5 ST3-1 Ratio formulas and...Ch. 3 - Prob. 3.2STPCh. 3 - Prob. 3.1WUECh. 3 - Learning Goal 1 E3-2 Explain why the income...Ch. 3 - Prob. 3.3WUECh. 3 - Prob. 3.4WUECh. 3 - Learning Goal 6 E3-5 If we know that a firm has a...Ch. 3 - Financial statement account identification Mark...Ch. 3 - Prob. 3.3PCh. 3 - Prob. 3.4PCh. 3 - Prob. 3.5PCh. 3 - Prob. 3.6PCh. 3 - Prob. 3.8PCh. 3 - Prob. 3.9PCh. 3 - Prob. 3.10PCh. 3 - Prob. 3.11PCh. 3 - Learning Goals 2, 3, 4, 5 P3-10 Ratio comparisons...Ch. 3 - Prob. 3.13PCh. 3 - Prob. 3.14PCh. 3 - Accounts receivable management The table below...Ch. 3 - Prob. 3.18PCh. 3 - Prob. 3.20PCh. 3 - The relationship between financial leverage and...Ch. 3 - Prob. 3.22PCh. 3 - Prob. 3.23PCh. 3 - Prob. 3.24PCh. 3 - Prob. 3.25PCh. 3 - Prob. 3.27PCh. 3 - Prob. 1SE
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