Question P1, Continued b. Discuss their financial risk and ability to cover the costs in relation to each other (Select all the choices that apply): OA. Pelican's earnings will be more volatile. This additional risk is supported by the significantly lower times interest earned ratio of Pelican. Timberland can face a very large reduction in net income and still be able to cover its interest expense. Pelican has a much higher degree of financial leverage than does Timberland. As a result, Pelican's earnings will be more volatile, causing the common stock owners to face greater risk. Oc. Timberland has a much higher degree of financial leverage than does Pelican. As a result, Timberland's earnings will be more volatile, causing the common stock owners to face greater risk. OD. Timberland's earnings will be more volatile. This additional risk is supported by the significantly lower times interest earned ratio of Timberland. Pelican can face a very large reduction in net income and still be able to cover its interest expense. c. Discuss their profitability relative to each other (Select all the choices that apply): OA. The return on equity for Pelican is higher than that of Timberland. OB. Pelican is more profitable than Timberland as shown by the higher net profit margin and return on assets. Oc. Timberland is more profitable than Pelican as shown by the higher net profit margin and return on assets. Od. The return on equity for Timberland is higher than that of Pelican. d. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks Timberland's investors undertake when they choose to purchase its stock instead of Pelican's? OA. Even though Pelican is more profitable (higher net profit margin), Timberland has higher ROE than Pelican due to the additional financial leverage risk. OB. Since Timberland has a higher relative amount of debt, the stockholders' equity is proportionally reduced resulting in the higher return on equity than that obtained by Pelican. The higher ROE brings with it higher levels of financial risk for Timberland equity holders. Oc. The lower profits of Timberland are due to the fact that interest expense is deducted from EBIT. OD. All of the above. e. If earnings are very violate which company's debt approach makes the most sense and why? Pelican P Timberland F la. Debt Ratio the Times Interest Earned 5,700,000 11.400 DO 1, 809,000 11.400,000.1579 EBIT 600000 Interest 190000 -33.33 600000 90510.53 570000 OP 6000000 24000000 .25 G000000 2400000o = .25 Operating Profit-sales Net Profit 3000000 2400000..125 Brocco 2610000 -10 875 24 000 000 3000000 11400000 ..2632 ROA for ROE for StockE 2610000 11 400000 .2289 3600000 5700000 =.5263 Earnings avai 3000 000 -:.3125 9600000 C. Question P1, Continued b. Discuss their financial risk and ability to cover the costs in relation to each other (Select all the choices that apply): OA. Pelican's earnings will be more volatile. This additional risk is supported by the significantly lower times interest earned ratio of Pelican. Timberland can face a very large reduction in net income and still be able to cover its interest expense. Pelican has a much higher degree of financial leverage than does Timberland. As a result, Pelican's earnings will be more volatile, causing the common stock owners to face greater risk. Oc. Timberland has a much higher degree of financial leverage than does Pelican. As a result, Timberland's earnings will be more volatile, causing the common stock owners to face greater risk. OD. Timberland's earnings will be more volatile. This additional risk is supported by the significantly lower times interest earned ratio of Timberland. Pelican can face a very large reduction in net income and still be able to cover its interest expense. c. Discuss their profitability relative to each other (Select all the choices that apply): OA. The return on equity for Pelican is higher than that of Timberland. OB. Pelican is more profitable than Timberland as shown by the higher net profit margin and return on assets. Oc. Timberland is more profitable than Pelican as shown by the higher net profit margin and return on assets. Od. The return on equity for Timberland is higher than that of Pelican. d. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks Timberland's investors undertake when they choose to purchase its stock instead of Pelican's? OA. Even though Pelican is more profitable (higher net profit margin), Timberland has higher ROE than Pelican due to the additional financial leverage risk. OB. Since Timberland has a higher relative amount of debt, the stockholders' equity is proportionally reduced resulting in the higher return on equity than that obtained by Pelican. The higher ROE brings with it higher levels of financial risk for Timberland equity holders. Oc. The lower profits of Timberland are due to the fact that interest expense is deducted from EBIT. OD. All of the above. e. If earnings are very violate which company's debt approach makes the most sense and why? Pelican P Timberland F la. Debt Ratio the Times Interest Earned 5,700,000 11.400 DO 1, 809,000 11.400,000.1579 EBIT 600000 Interest 190000 -33.33 600000 90510.53 570000 OP 6000000 24000000 .25 G000000 2400000o = .25 Operating Profit-sales Net Profit 3000000 2400000..125 Brocco 2610000 -10 875 24 000 000 3000000 11400000 ..2632 ROA for ROE for StockE 2610000 11 400000 .2289 3600000 5700000 =.5263 Earnings avai 3000 000 -:.3125 9600000 C
