LI00 a Firm\'s CHAPTER 4 n associate credit analyst for the Merchants National B
ID: 2729835 • Letter: L
Question
LI00 a Firm's CHAPTER 4 n associate credit analyst for the Merchants National Bank of Midland, w was assigned the task of analyzing Jarmon's loan request. late the financial ratios for 2015 corresponding to the industry norms turnover based cost of goods sold) b Which of the ratios reported in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? Prepare Jarmon's statement of cash flows for the year ended December 31, 2015 Interpret your findings. d. Use the information provided by the financial ratios and the cash flow state- ment to decide if you would support making the loan. 4-12 Economic Value Added) K Johnson, Inc.'s managers want to evaluate the firm's prior year performance in terms of its contribution to shareholder value. This past neat, the firm earned an operating return on investment of 12 percent, compared to an industry norm of 11 percent. It has been estimated that the firm's investors have an opportunity cost on their funds of 14 percent, which is the same as the firm's overall cost of capital. The firm's total assets for the year were S100 million. Compute the amount of economic value created or destroyed by the firm. How does your finding support or fail to support what you would conclude using ratio analysis to evaluate 4-13 Identifying an industry to use for benchmarking your firm's results with those of similar companies is not always easy. Choose a type of business and go to www.naics.com. This website allows you to do a free search for the NAICS (North American Industry classification System, pronounced "Nakes") number for differ- ent types of businesses. Choose key words such as "athletic shoes" or "auto dealers" and others to see to which industry these businesses have been assigned -14 (Market-value ratios) Garret Industries has a price/earnings ratio of 16.29x. a. Garret's earnings per share are si 35, what is the price per share of Garret's b. Using the price per share you found in part (a), determine the price/book ratio if Garret's equity-book value per share is $9.58 4:15 inancing decisions) Emma's Electronics Incorporated has total assets of 63 million and total debt of s42 million. The company also has operating profits of million with interest expenses of S6 million. What is Emma's debt ratio? What is Emma's times interest earned? Based on the information above, would you recommend to Emma ment that the firm is in a strong enough position to assume more debt and increase interest expense to million?Explanation / Answer
Question 4-15:
Given data,
Total Assets = $63 million
Total Debt = $42 million
Operating Profits = $21 million
Interest Expense = $6 million
Requirement a:
Debt Ratio = Debt / Total Assets
= $42 million / $63 million
= 0.6667
= 66.67%
Requirement b:
Times Interest Earned = Operating Profits / Interest Expense
= $21 million / $6 million
= 3.5 times
Requirement c:
Lower debt ratios are considered better. Here the debt ratio is more than half. Increasing the debt further is not good for the company. Hence more debt should not be raised.
Operating profit covers 3.5 times the operating profit.
If interest expense increases to $9 million, times interest earned = $21 million / $9 million
= 2.33 times
Hence interest expense can be increased further to $9 million.
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