Exam 4: Profitability Analysis

The ability of a firm to manage the level of investment in assets for a particular level of sales is measured by the ______________________________.

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries.The company has an effective tax rate of 35%. Balance Sheet Assets: Cash Accounts Receivable (net) Inventory Long-lived assets Less: Accumulated depreciation Total assets 2011 2010 \ 10,000 \ 6,000 6,000 1,500 8,000 10,000 12,000 11,000 $\text { Liabilities and Stockholders' Equity: }$ Accounts payable \ 5,000 \ 6,000 Deferred revenues 1,000 2,000 Long-term note payable 10,000 10,000 Less: Discount on note payable (800) (1,000) Common stock 12,000 6,000 Retained earnings Total liabilities and stockholders' equity Income Statement For the year ended December 31, 2011 Revenues \4 2,000 Cast af goods sold (24,000) Depreciation expense (2,000) Interest expense (3,000) Bad debt exanense (2,000) Other expense (including income taxes) Net incame -Refer to the information for Orca Industries.The return on assets for Orca Industries is:

Ramos Company Ramos Company included the following information in its annual report: Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net income 13,400 10,000 10,500 -Refer to the information for Ramos Company.In a common size income statement for 2009,the cost of goods sold is expressed as: 

Linda's Clothing is a retailer of contemporary women's clothing.Selected financial information for Linda's appears below: Net Income \ 56,759 \ 31,150 \ 15,375 \ 14,750 Total Assets at year-end \ 381,500 \ 246,250 \ 145,490 \ 71,268 Weighted Average number of shares Outstanding 84,215 80,546 77,965 75,888 Total Liablities at year-end 205,967 119,657 60,522 17,623 Common Stockholders' Equity atyear-end \ 175,533 \ 126,593 \ 84,968 \ 53,645 Interest Expense 165 195 258 368 Required: a.Compute the rate of return on assets for the years 2009-2011.Linda's has an effective tax rate of 35%. b.Compute the rate of return on common shareholders' equity for the years 2009-2011. c.Compute basic earnings per share for the years 2009-2011. d.Interpret the changes in ROA versus ROCE and EPS over the three-year period.

The computation of the additional shares to be issued on the exercise of stock options Assumes that the firm would repurchase common shares on the open market using an Amount equal to the sum of all the following except:

Which of the following are better indicated by percentage change statements than common-size statements?

Ramos Company Ramos Company included the following information in its annual report: Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net income 13,400 10,000 10,500 - Refer to the information for Ramos Company.In a common size income statement for 2011,the operating expenses are expressed as: 

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETE (\$in thausands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 2010 2009 \ 875,650 \ 571,250 154,230 6,560 0 0 771,580 775,250 902,000 1,320,150 1,254,600 1,418,500 3,222,940 2,832,300 2,704,630 1,118,750 1,100,300 1,122,400 263,050 241,000 215,600 LIABILITIES (\ in thousands) Fiscal year end Accounts payable Current long term debt Accrued expenses Income taxes payable Other current liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Additional Paid-in Capital Retained earnings Treasury stock Shareholders' equity Total Liab, \& Equity 2011 2010 2009 \ 1,178,540 \ 1,061,100 \ 1,138,250 18,100 316,500 150,900 664,100 615,900 585,400 138,900 108,400 38,200 1,999,640 2,101,900 1,912,750 478,250 378,400 599,630 2,491,240 2,480,300 2,512,380 850,000 850,000 550,000 4,000 3,950 3,800 869,000 758,000 689,500 1,430,500 1,055,000 1,245,050 \ INCOME STATEMENTS (f in thousands) Fiscal year end Net sales \ 11,455,500 \ 11,082,100 Cost of Goods Sold Gross profit 3,429,050 3,142,035 Selling, general \& admin. Exp. Income before deprec. \& amort. 1,592,650 1,352,835 Depreciation \& amortization (785,250) (757,250) Interest expense Income before tax 761,205 552,245 Provision for income taxes (157,725) (112,290) Minority interest -- -- Net income Outstanding shares (in thousands) 308,515 303,095 Preferred Dividends (in thousands) \ 85,000 \ 85,000 -Refer to the information for Net Devices Inc.What is Net Devices' capital structure leverage ratio for 2011?

Extreme Sports Company and All Sports Corporation Below is financial information for two sporting goods retailers.Extreme Sports Company operates a retail business and franchising business.At the end 2011, Extreme Sports had 263 Company-owned and 120 franchise-operated retail stores.Extreme's stores are located in suburban, strip mall and regional mall locations, the company operates in 32 states.All Sports Corporation sells sporting goods and related products at over 2,500 Company-operated retail stores. Selected Data for All Sports and Extreme Sports (amounts in millions) All Sports Extreme Sports Sales \ 5,320 \ 1,344 Cost of Goods Sold 3,897 887 Interest Expense 138 43 Net Income 212 236 Average Inventory 998 130 Average Fixed Assets 1,163 662 Average Total Assets 2,472 40\% -Refer to the information for Extreme Sports Company and All Sports Corporation. Compute the Asset Turnover for All Sports.

Discuss the economic characteristics of firms that have the following mix of profit margin and asset turnover.In addition provide an example of an industry that would have the relevant profit margin asset turnover mix: A.High profit margin and low asset turnover. B.Low profit margin and high asset turnover

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETE (\$in thausands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 2010 2009 \ 875,650 \ 571,250 154,230 6,560 0 0 771,580 775,250 902,000 1,320,150 1,254,600 1,418,500 3,222,940 2,832,300 2,704,630 1,118,750 1,100,300 1,122,400 263,050 241,000 215,600 LIABILITIES (\ in thousands) Fiscal year end Accounts payable Current long term debt Accrued expenses Income taxes payable Other current liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Additional Paid-in Capital Retained earnings Treasury stock Shareholders' equity Total Liab, \& Equity 2011 2010 2009 \ 1,178,540 \ 1,061,100 \ 1,138,250 18,100 316,500 150,900 664,100 615,900 585,400 138,900 108,400 38,200 1,999,640 2,101,900 1,912,750 478,250 378,400 599,630 2,491,240 2,480,300 2,512,380 850,000 850,000 550,000 4,000 3,950 3,800 869,000 758,000 689,500 1,430,500 1,055,000 1,245,050 \ INCOME STATEMENTS (f in thousands) Fiscal year end Net sales \ 11,455,500 \ 11,082,100 Cost of Goods Sold Gross profit 3,429,050 3,142,035 Selling, general \& admin. Exp. Income before deprec. \& amort. 1,592,650 1,352,835 Depreciation \& amortization (785,250) (757,250) Interest expense Income before tax 761,205 552,245 Provision for income taxes (157,725) (112,290) Minority interest -- -- Net income Outstanding shares (in thousands) 308,515 303,095 Preferred Dividends (in thousands) \ 85,000 \ 85,000 -Refer to the information for Net Devices Inc.What is Net Devices' earnings per share for 2011?

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries.The company has an effective tax rate of 35%. Balance Sheet Assets: Cash Accounts Receivable (net) Inventory Long-lived assets Less: Accumulated depreciation Total assets 2011 2010 \ 10,000 \ 6,000 6,000 1,500 8,000 10,000 12,000 11,000 $\text { Liabilities and Stockholders' Equity: }$ Accounts payable \ 5,000 \ 6,000 Deferred revenues 1,000 2,000 Long-term note payable 10,000 10,000 Less: Discount on note payable (800) (1,000) Common stock 12,000 6,000 Retained earnings Total liabilities and stockholders' equity Income Statement For the year ended December 31, 2011 Revenues \4 2,000 Cast af goods sold (24,000) Depreciation expense (2,000) Interest expense (3,000) Bad debt exanense (2,000) Other expense (including income taxes) Net incame -Refer to the information for Orca Industries.Orca's asset turnover is:

Return on assets can be disaggregated into three components.Which of the following is not one of the components?

To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.

Sensitron and Douglas Tools manufacture and market power tools and accessories.Sensitron targets customers in the professional contractor market,while Douglas Tools focuses on home users and professionals.Both firms use the same cost flow assumption for valuing inventories and cost of goods sold.Selected financial data for the companies appears below. Sensitron Cost of Goods Sold \ 1,144,200 \ 1,134,100 \ 1,169,400 Average Inventory 372,550 397,050 436,870 Change in Sales from previous year 0.64\% -3.68\% 11.83\% Douglas Tools Cost of Goods Sold \ 2,876,100 \ 2,846,600 \ 2,889,000 Average Inventory 730,550 778,100 797,500 Change in Sales from previous year 3.50\% -5.12\% 0.59\% Required: 1.Calculate the inventory turnover ratio for each firm for year 2010,2009,and 2008. 2.Suggest reasons for the differences in the Inventory turnover ratios for these two firms.

Accounts receivable turnover is calculated by dividing ________________________________________ by average net accounts receivable.

Raleigh Manufacturing reported net income (amounts in millions)of $1,166 on sales of $5,520 during Year 4.Interest expense totaled $75.The income tax rate was 30 percent.Average total assets were $7,135,and average common shareholders' equity was $3,405.The firm did not have preferred stock outstanding or minority interest in its equity. REQUIRED: a.Compute the rate of ROA.Disaggregate ROA into profit margin for ROA and assets turnover components. b.Compute the rate of ROCE.Disaggregate ROCE into profit margin for ROCE,assets turnover,and capital structure leverage ratio components. c.Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital and the amount from the return on common shareholders' capital.

Below is financial information for two sporting goods retailers.Extreme Sports Company operates a retail business and franchising business.At the end 2011,Extreme Sports had 263 Company-owned and 120 franchise-operated retail stores.Extreme's stores are located in suburban,strip mall and regional mall locations,the company operates in 32 states.All Sports Corporation sells sporting goods and related products at over 2,500 Company-operated retail stores. Selected Data for All Sports and Extreme Sports (amounts in millions) All Sports Extreme Sports Sales \ 5,320 \ 1,344 Cost of Goods Sold 3,897 887 Interest Expense 138 43 Net Income 212 33 Average Accounts Receivable 114 18 Average Inventory 998 286 Average Fixed Assets 1,163 130 Average Total Assets 2,472 662 Average Tax Rate 40\% 40\% Calculate the following ratios for All Sports and Extreme Sports: a.Return on assets b.Profit margin for ROA c.Assets turnover d.Accounts receivable turnover e.Inventory turnover f.Fixed asset turnover

Which of the following is the primary objective in most financial statement analysis?

Multiples of EPS to value firms are referred to as: