Financial ratios are essential to assessing to provide an accurate valuation of a firm. Select a publicly-traded firm of your choice. You may use the firm you have elected to profile for the course-long assignment "Financial Analysis and Proposal" or a completely different organization altogether. Select one ratio each in the areas of 1) performance, 2) activity, 3) financing, and 4) liquidity warnings. Provide an evaluation of the selected firm?s strengths and weaknesses. Based on the ratios you selected, how well does your chosen firm perform? Explain.

Attached are a couple of Excel toolkits for the chapters we study this week. These are quite useful in understanding the text (the calculations behind the tables of figures) as well as in completing the homework.

\fA 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 B Tool Kit C Chapter 3 D E Analysis of Financial Statements Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of other firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis more revealing, one below are exceptionally useful for this type of analysis. 3-1 Financial Analysis Input Data: 2013 $27.00 50 40% 11.0% $28 $20 Year-end common stock price Year-end shares outstanding (in millions) Tax rate After-tax cost of capital Lease payments Required sinking fund payments 2012 $40.00 50 40% 10.5% $28 $20 Figure 3-1 MicroDrive Inc. Balance Sheets and Income Statements for Years Ending December 31 (Millions of Dollars, Except for Per Share Data) Balance Sheets Assets Cash and equivalents Short-term investments Accounts receivable Inventories Total current assets Net plant and equipment Total assets Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total liabilities Preferred stock (400,000 shares) Common stock (50,000,000 shares) Retained earnings Total common equity Total liabilities and equity Income Statements Net sales Costs of goods sold except depreciation Depreciation Other operating expenses Earnings before interest and taxes (EBIT) 2013 $ $ $ $ $ $ $ $ 50 500 1,000 1,550 2,000 3,550 $ 200 280 300 780 1,200 1,980 100 500 970 1,470 3,550 $ 2013 5,000 3,800 200 500 $ 500 $ 2012 $ $ $ $ $ $ 60 40 380 820 1,300 1,700 3,000 190 130 280 600 1,000 1,600 100 500 800 1,300 3,000 2012 4,760 3,560 170 480 $ 550 $ A B 52 Less interest Pre-tax earnings 53 54 Taxes (40%) Net Income before preferred dividends 55 56 Preferred dividends 57 Net Income available to common stockholders 58 Other Data 59 Common dividends 60 Addition to retained earnings 61 Lease payments 62 Bonds' required sinking fund payments 63 Common stock price per share 64 C D $ $ $ E 120 380 152 228 8 220 $50 $170 $28 $20 $27 $ $ $ 100 450 180 270 8 262 $48 $214 $28 $20 $40 A 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 B C D E Calculated Data: Operating Performance and Cash Flows Net operating working capital (NOWC) Total operating capital Net operating profit after taxes (NOPAT) Return on capital (ROIC) Free cash flow (FCF) Net cash flow (Net income + Depreciation) $ Earnings before interest, taxes, depreciation & amortization (EBITDA) = EBIT + Depreciation & amortization Market capitalization (# shares x price per share) 2013 $1,050 $3,050 $300 9.8% ($260) 420 $700 $1,350 Calculated Data: Per-share Information 2013 $4.40 $1.00 $29.40 $8.40 $14.00 ($5.20) Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Cash flow per share (CFPS) EDITDA per share Free cash flow per share (FCFPS) 3-2 Liquidity Ratios Liquidity ratios Current Ratio = CA/CL Quick Ratio = (CA - Inventories)/CL 2013 2012 2.0 0.7 2.2 0.8 2013 2012 1.4 2.5 36.5 4.0 1.6 2.8 29.1 4.5 2013 2012 41.7% 1.01 52.3% 55.8% 4.2 37.7% 0.87 36.1% 53.3% 5.5 4.3 5.1 2013 2012 3-3 Asset Management Ratios Asset Management ratios Total Asset Turnover = Sales/TA Fixed Asset Turnover = Sales/Fixed assets Days Sales Outstanding = Accounts receivable/Daily sales Inventory Turnover = COGS/Inventories 3-4 Debt Management Ratios Debt Management ratios Debt Ratio = Debt-to-Assets Ratio = Total debt/TA Debt-to-Equity Ratio = Total debt/Total common equity Market Debt Ratio = Total debt/(Total debt + Market Cap) Liabilities-to-Assets Ratio = TL/TA Times Interest Earned = EBIT/Interest expense EBITDA Coverage Ratio = (EBIT + Depreciation + Lease pmt) (Interest + Principal pmt + Lease pmt) 3-5 Profitability Ratios A B C 112 113 114 115 116 117 118 119 120 121 Profitability ratios Profit Margin = Net income/Sales Basic Earning Power = EBIT/TA Return on Assets = Net income/TA Return on Equity = Net income/Total common equity Market Value ratios Price-to Earnings Ratio = Price/(Net income/# shares) 122 123 124 125 126 127 128 129 D E 4.4% 14.1% 6.2% 15.0% 5.5% 18.3% 8.7% 20.2% 2013 2012 6.1 7.6 Price-to-Cash Flow Ratio = Price (Net income + Depreciation)/# shares 3.2 4.6 Price-to-EBITDA Ratio = Price (EBIT + Depreciation)/# shares Market-to-Book Ratio = Price/(Total common equity/#shares) 1.9 0.9 2.8 1.5 3-6 Market Value Ratios 3-7 Trend Analysis, Common Size Analysis, and Percentage Change Analysis TREND ANALYSIS Trend analysis allows you to see how a firm's results are changing over time. For instance, a firm's ROE may be slightly below the benchmark, but if it has been steadily rising over the past four years, that should be seen as a good sign. 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 A trend analysis and graph have been constructed on this data regarding MicroDrive's ROE over the past 5 years. (MicroDrive and indusry average data for earlier years has been provided.) ROE 2009 2010 2011 2012 2013 MicroDrive 15.0% 18.0% 21.0% 20.2% 15.0% Industry 14.0% 15.0% 18.0% 17.0% 19.0% Figure 3-2 MicroDrive, Inc.: Return on Common Equity ROE (%) 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2009 2010 2011 2012 2013 (%) 22.0% 20.0% 18.0% 16.0% A 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 B C D E 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2009 2010 2011 2012 2013 A 170 171 172 173 174 B C Industry Composite 2013 100.0% 75.5% 3.0% 10.0% 11.5% 1.2% 10.4% 4.1% 6.2% 0.0% 6.2% Net sales Costs of goods sold except depreciation Depreciation Other operating expenses Earnings before interest and taxes (EBIT) Less interest Pre-tax earnings Taxes (40%) Net Income before preferred dividends Preferred dividends Net Income available to common stockholders MicroDrive 2013 100.0% 76.0% 4.0% 10.0% 10.0% 2.4% 7.6% 3.0% 4.6% 0.2% 4.4% In common sheets, all items for a year are divided by the total assets for that year. Figure 3-4 MicroDrive Inc.: Common Size Balance Sheets 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 E Figure 3-3 MicroDrive Inc.: Common Size Income Statements 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 D COMMON SIZE ANALYSIS In common size income statements, all items for a year are divided by the sales for that year. Industry Composite 2013 MicroDrive 2013 2012 Assets Cash and equivalents Short-term investments Accounts receivable Inventories Total current assets Net plant and equipment Total assets 1.8% 0.0% 14.0% 26.3% 42.1% 57.9% 100.0% 1.4% 0.0% 14.1% 28.2% 43.7% 56.3% 100.0% 2.0% 1.3% 12.7% 27.3% 43.3% 56.7% 100.0% Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total liabilities Preferred stock Total common equity Total liabilities and equity 7.0% 0.0% 12.3% 19.3% 25.4% 44.7% 0.0% 55.3% 100.0% 5.6% 7.9% 8.5% 22.0% 33.8% 55.8% 2.8% 41.4% 100.0% 6.3% 4.3% 9.3% 20.0% 33.3% 53.3% 3.3% 43.3% 100.0% PERCENT CHANGE ANALYSIS A 220 B C D E A 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 B C D E In percent change analysis, all items are divided by the that item's value in the beginning, or base, year. Figure 3-5 MicroDrive Inc.: Income Statement Percent Change Analysis Percent Change in 2013 5.0% 6.7% 17.6% 4.2% (9.1%) 20.0% (15.6%) (15.6%) (15.6%) 0.0% (16.0%) Base year = 2012 Net sales Costs of goods sold except depreciation Depreciation Other operating expenses Earnings before interest and taxes (EBIT) Less interest Pre-tax earnings Taxes (40%) Net Income before preferred dividends Preferred dividends Net income available to common stockholders MicroDrive, Inc.: Balance Sheet Percent Change Analysis (not in textbook) Percent Base year = 2012 Change in 2013 Assets Cash and equivalents (16.7%) Short-term investments (100.0%) Accounts receivable 31.6% Inventories 22.0% Total current assets 19.2% Net plant and equipment 17.6% Total assets 18.3% Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total liabilities Preferred stock (400,000 shares) Common stock (50,000,000 shares) Retained earnings Total common equity Total liabilities and equity 5.3% 115.4% 7.1% 30.0% 20.0% 23.8% 0.0% 0.0% 21.3% 13.1% 18.3% DUPONT ANALYSIS (Section 3-8) ROE = Profit margin x TA turnover x A 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 MicroDrive MicroDrive Industry Average B C D E 2013 2012 15.0% 20.2% 20.3% 4.40% 5.50% 6.20% 1.41 1.59 1.80 Profit margin x 4.40% TA turnover x 1.80 Suppose MicroDrive can improve its total asset turnover ratio. Improved TA turover ratio = 1.8 ROE = 19.1% F 1 12/8/2012 2 3 4 d then comparing them5with the ratios of also combine ratios to make 6 the analysis alysis. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 G F 52 53 54 55 56 57 58 59 60 61 62 63 64 G F 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 G 2012 $790 $2,490 $330 13.3% N/A $432 $720 $2,000 2012 $5.24 $0.96 $26.00 $8.64 $14.40 N/A Industry Average 2.2 0.8 Industry Average 1.8 3 30 5 Industry Average 25.0% 0.46 20.0% 45.0% 10.0 108 12.0 109 110 111 Industry Average F 112 113 114 115 116 117 118 119 120 121 G 6.2% 20.2% 11.0% 19.0% Industry Average 10.5 122 6.3 123 124 125 126 127 128 4.0 1.8 er time. For instance, a firm's ROE may be slightly below the 129 that should be seen as a good sign. 130 ing MicroDrive's ROE over the past 5 years. (MicroDrive and 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 2013 F 2013 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 G F 170 171 172 173 174 175 MicroDrive 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 2012 100.0% 74.8% 3.6% 10.1% 11.6% 2.1% 9.5% 3.8% 5.7% 0.2% 5.5% G F 220 G F ue in the beginning, or221 base, year. 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 Equity multiplier G F 270 271 272 273 274 275 276 277 2.415 2.308 1.818 278 Equity multiplier 2.415 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 G SECTION 3-2 SOLUTIONS TO SELF-TEST A company has current liabilities of $800 million, and its current ratio is 2.5. What is its level of current assets? If this firm's quick ratio is 2, how much inventory does it have? Current liabilities ($M) Current ratio Current assets ($M) Current liabilities ($M) Current ratio Quick ratio Current assets - Inventories Inventories ($M) $800 2.5 $2,000 $800 2.5 2.0 $1,600 $400 SECTION 3-2 SOLUTIONS TO SELF-TEST QUESTIONS A firm has $200 million annual sales, $180 million costs of goods sold, $40 million of inventory, and $60 million of accounts receivable. What is its inventory turnover ratio? Annual Sales ($M) Costs of good sold ($M) Inventory ($M) Accounts receivable ($M) Inventory turnover $200 $180 $40 $60 4.5 Annual Sales ($M) Inventory ($M) Accounts receivable ($M) $200 $40 $60 Days sales outstanding 109.5 SECTION 3-4 SOLUTIONS TO SELF-TEST A company has EBITDA of $600 million, interest payments of $60 million, lease payments of $40 million, and required principal payments (due this year) of $30 million. What is its EBITDA coverage ratio? EBITDA ($M) Interest payments Lease payments Principal payments EBITDA coverage $600 $60 $40 $30 4.9 SECTION 3-5 SOLUTIONS TO SELF-TEST A company has $200 billion of sales and $10 billion of net income. Its total assets are $100 billion, financed half by debt and half by common equity. What is its profit margin? What is its ROA? What is its ROE? Sales ($B) Net income ($B) Total assets ($B) Debt ratio Profit margin Sales ($B) Net income ($B) Total assets ($B) Debt ratio ROA Sales ($B) Net income ($B) Total assets ($B) Debt ratio ROE $200 $10 $100 50% 5.00% $200 $10 $100 50% 10.00% $200 $10 $100 50% 20.00% SECTION 3-6 SOLUTIONS TO SELF-TEST A company has $6 billion of net income, $2 billion of depreciation and amortization, $80 billion of common equity, and one billion shares of stock. If its stock price is $96 per share, what is its price/earnings ratio? Its price/cash flow ratio? Its market/book ratio? Net income ($B) Amortization and depreciation ($B) Common equity Number of shares ($B) Stock price per share $6 $2 $80 1 $96 Earnings per share P/E ratio $6 16.00 Cash flow Cash flow per share Price/cash flow $8.00 8.00 12.00 Book value per share Market/Book 80.00 1.20 SECTION 3-8 SOLUTIONS TO SELF-TEST A company has a profit margin of 6%, a total asset turnover ratio of 2, and an equity multiplier of 1.5. What is its ROE? Profit margin Total asset turnover Equity multiplier ROE 6.0% 2.0 1.5 18.0% 12/8/2012 Mini Case Data Input Data: 2012 $8.50 100,000 40% $40,000 2013 $6.00 100,000 40% $40,000 2014 $12.17 250,000 40% $40,000 Assets Cash and equivalents Short-term investments Accounts receivable Inventories Total current assets Gross Fixed Assets Less Accumulated Dep. Net Fixed Assets Total Assets 0 $9,000 $48,600 $351,200 $715,200 $1,124,000 $491,000 $146,200 $344,800 $1,468,800 48600 $7,282 $20,000 $632,160 $1,287,360 $1,946,802 $1,202,950 $263,160 $939,790 $2,886,592 20000 $14,000 $71,632 $878,000 $1,716,480 $2,680,112 $1,220,000 $383,160 $836,840 $3,516,952 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total liabilities Common stock (100,000 shares) Retained earnings Total common equity Total liabilities and equity $145,600 $200,000 $136,000 $481,600 $323,432 $805,032 $460,000 $203,768 $663,768 $1,468,800 $324,000 $720,000 $284,960 $1,328,960 $1,000,000 $2,328,960 $460,000 $97,632 $557,632 $2,886,592 $359,800 $300,000 $380,000 $1,039,800 $500,000 $1,539,800 $1,680,936 $296,216 $1,977,152 $3,516,952 0 $3,432,000 $2,864,000 $18,900 $340,000 $3,222,900 $209,100 $62,500 $146,600 $58,640 $87,960 $0.880 $0.220 $6.638 48600 $5,834,400 $4,980,000 $116,960 $720,000 $5,816,960 $17,440 $176,000 ($158,560) ($63,424) ($95,136) ($0.951) $0.110 $5.576 20000 $7,035,600 $5,800,000 $120,000 $612,960 $6,532,960 $502,640 $80,000 $422,640 $169,056 $253,584 $1.014 $0.220 $7.909 Year-end common stock price Year-end shares outstanding Tax rate Lease payments Balance Sheets Income Statements Net sales Costs of Goods Sold Except Depr. Depreciation and amortization Other Expenses Total Operating Cost Earnings before interest and taxes ( Less interest Pre-tax earnings Taxes (40%) Net Income before preferred dividen EPS DPS Book Value Per Share