Mid-Term Problems
Mid-Term Problems
Mid-Term Problems
SAYASSTATEUNI VERSITY-MAI
NCAMPUS
LUNAST.,LAPAZ,I
LOILOCITY
FINANCIALMANAGEMENT
MIDTERM EXAMINATION
PART2:
PROBLEMS
i
ndust
ryav
eragef
orDeLeonI
ncor
por
ated.
Ast
heassi st
ant,
y ouarerequiredtoprovi
deanswertot
hefol
lowingquesti
ons.
a)Calculat
etheindicatedrat
iosfor2020.Whatcanyousayaboutthevari
ous
rat
iosofDeLeonI ncorpor
ated?Howdoesi tcompar
ewiththeindust
ry
average?
I
ndustr
y
2020 2019 Aver
age
Cur
rent 2.
34 1.
2 2.
7
Qui
ck 0.
8 0.
4 1
I
nv entoryturnover 3.9 4.
7 6.
1
Day ssalesout st
anding 38
(DSO) days 38.
2 32
FixedAsset sTO 8 6.
4 7
Total AssetTO 2.2 2.
1 2.
6
Debt -
to-assetrati
o 44.
17% 82.
80% 50%
TimesI nterestEarned
Ratio 7.
04 1 6.
2
Oper ati
ngMar gin 7.
00% 2.20% 7.
30%
ProfitMar gi
n 3.
60% 2.70% 3.
50%
ROA 7.
97% 5.60% 9.
10%
ROE 20.
74% 32.
50% 18.
20%
b)UsetheDuPontEquat
iont
oprovi
deasummaryandovervi
ewofDeLeon’
s
fi
nanci
alcondi
ti
oni
n2013.Whatar
ethef
ir
m’smajorst
rengthsand
weaknesses?
DupontEquat
ion 253,
584.
00
1,
090,
588.
00
23.
25%
Strengt hs:Thef i
rm’sf i
x edasset st urnov erwasabov et hei ndust r
y
av erage.Howev er,i
ft hef irm’ sasset swer eol derthanot herf i
rms
i
ni tsindust ryt hiscoul dpossi blyaccountf orthehi gherr atio.
(D’Leon’ sfixedasset swoul dhav eal owerhi st ori
cal costand
woul dhav ebeendepr eci atedf orlongerper iodsoft ime. )The
fir
m’ spr ofi
tmar ginissl i
ght l
yabov ethei ndust ryav erage, andi ts
debtr atiohasbeengr eat lyreduced, soi tisnowbel owt he
i
ndust r
yav er age( whi chi sgood) .Thi si mpr ov edpr ofitmar gin
coul dindicat et hatthef irm haskeptoper atingcost sdownaswel l
asi nterestexpense( asshownf rom t her educeddebtr at i
o) .
Interestexpensei slowerbecauset hef ir
m’ sdebtr atiohasbeen
reduced, whi chhasi mpr ov edt hef irm’ sTI Er atiosot hati tisnow
abov et heindust r
yav er age.
Weaknesses: Thef i
rm’ scur rentassetr atioisl ow;mostofi ts
assetmanagementr atiosar epoor( exceptf ixedasset st ur nover
);
mostofi tspr ofitabi
lityr atiosar el ow( exceptpr ofi
tmar gi n);and
i
t smar ketv aluer ati
osar elow.
c)In2019, thecompanypai dt hesuppl iersmuchl at
ert hant heduedat es;
alsoi
t
wasnotmai nt ainingf inanci alratiosatl ev elscal l
edf orint hebankl oan
agr eement s.Ther ef
or e, suppl i
erscoul dcutt hecompanyof f,anditsbank
coul drefuset or enewt hel oanwheni tcomesduei n90day s.Ont hebasisof
dat apr ov ided, woul dy ouasacr edi tmanager ,continuet osel l t
oDeLeonon
credi t.Si mi larly ,i
fy ouwer et hebankl oanof ficer,woul dy our ecommend
renewi ngt hel oanordemandi tsrepay ment ?
Whi let hef irm’ sr at iosbasedont hepr oject eddat aappeart obe
i
mpr ov ing, thef i
rm’ scur rentassetr at ioi sl ow.Asacr edi t
manager ,y ouwoul dnotcont inuet oex tendcr edittot hef irm
underi tscur rentar rangement , par t
icul ar lyifmyf irm didn’ thav e
anyexcesscapaci ty .Ter msofCODmi ghtbeal it
tlehar shand
mightpusht hef i
rmi ntobankr upt cy.Li kewi se, ifthebank
demandedr epay mentt hiscoul dal sof or cet hef i
rmi nto
bankr upt cy .
Credi tor s’ act ionswoul ddef initelybei nf l
uencedbyan
i
nf usionofequi t
ycapi tal int hef ir
m.Thi swoul dlowert hef i
rm’ s
debtr atioandcr edi tors’ riskexposur e.
d)Whatar esomepot ent ial pr obl emsandl i
mi tationsoff i
nanci al r
ati
oanal
ysi
s?
Somepot ent ial probl emsar el isted
below:
1.Compar isonwi thi ndust ryav eragesi sdi fficultifthef i
rm
oper at esmanydi ffer entdi visions.
2.Di ffer entoper at ingandaccount i
ngpr act icesdi stort
compar isons.
3.Somet imeshar dt ot ell i
far atiois“ good”or“ bad.”
4.Di fficul tt ot ell whet hercompanyi s, onbal ance, i
nast rongor
weakposi tion.
5.“ Av erage”per for mancei snotnecessar ilygood.
6.Seasonal fact or scandi st ortr atios.
7.“ Wi ndowdr essi ng”t echni quescanmakest atement sand
ratiosl ookbet ter .
8.Inf lationhasbadl ydi st or tedmanyf irms’ bal ancesheet s, soa
ratioanal y sisf oronef irm ov ert i
me, oracompar ativeanal y
sis
off irmsofdi ffer entages, mustbei nt er pretedwi thjudgment .
e)Whatar esomequal itat ivef act or st hatanal y stsshoul dconsi derwhen
eval uat ingacompany ’
sl ikel yf utur eper formance.
Topanal yst sr ecogni zet hatcer tainqual i
tativ e
fact orsmustbeconsi der edwhenev al uat ingacompany .These
fact ors, assummar izedbyt heAmer icanAssoci ationofI ndividual
Invest or s( AAI I),ar easf ollows:
1.Ar et hecompany ’
sr ev enuest i
edt oonekeycust omer ?
2.Towhatext entar ethecompany ’srevenuest i
edtoonekey
product ?
3.Towhatext entdoest hecompanyr elyonasi nglesuppl i
er?
4.Whatper centageoft hecompany ’
sbusinessisgener ated
ov erseas?
5.Howmuchcompet it
iondoest hefir
mf ace?
6.I sitnecessaryf orthecompanyt ocontinual
lyinvestin
resear chanddev elopment ?
7.Ar echangesi nlawsandr egul
ationsli
kelytohav eimpor tant
impl i
cationsfort hef i
rm?
2.A20- yearol dstudentwant stosaveP3. 00adayf orherr et
irement .Ev
erydayshe
places3i nadrawer .Att heendofeachy ear,sheinveststheaccumul atedsavi
ng
(P1,095)i nabroker ageaccountwi t
hanexpect edannual r
eturnof12%.( 15
points)
a)I fshekeepssav i
ngi nthismanner ,howmuchwi l
lshehav eaccumul atedat
age65?
b)I fa40-year-ol
dinvest
orbegansav inginthismanner,howmuchwoul dhe
haveatage65?
c)Howmuchwoul dthe40-year-
oldinvestorhavetosaveeachy earto
accumul atethesameamountat65ast he20-year
-oldinvest
or?
3.MidwestEl ectri
cCompanyusesonl ydebtandcommonequi ty.I
tcanbor r
ow
unli
mi t
edamount satanint
erestrat
eof10%asl ongasi tsfi
nancesatitstar
get
capitalst
ructure,whi
chcall
sfor45%debtand55%commonequi ty.I
tsl
ast
divi
dendwasP2. 00,i
tsexpectedconstantgrowthrateis4%andi t
scommon
stocksell
sf orP20.MECst axrateis40%.Twopr oj
ectsareav ai
l
able.Pr
ojectA
hasarateofret
urnof13%,whi
leProj
ectB’sret
urnis10%.Thesetwopr
ojects
areequal
lyr
iskyandaboutasr
iskyasthefi
rmsexisti
ngassets.(
10poi
nts)
a.Whati st
hecostofthecommonequi t
y?
RE 2.
08 0.
04 14.
4%
+
20
b.Whati
stheWACC?
WACC=(
0.45)
(10%)
(1−0.
40)
+(0.
55)
(14.
4%)=10.
62%
c.Whi
chpr
ojectshoul
dMi
dwestaccept
?
Wecompar et hefi
rm’st
ot her
ateofreturnontheinvest
ment s(I
RR)
.Wesee
thatProjectA’sret
urnexceedsthecostofcapi
tal,
whi l
ePr oj
ectBof
fer
sa
returnlessthanthecostofcapi
tal.Hence,weacceptProjectAandrej
ect
ProjectB.
“Cur
iosi
tyi
sthebeginni
ngofknowledge,
but
underst
andi
ngisthebeginni
ngofwisdom.”
-
DebasishMr i
dha
GOODLUCK!
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