Essay About Firm B And Higher Profit Margin

Examples of Questions on Ratio Analysis
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Examples of Questions on Ratio AnalysisA: Multiple Choice Questions1. Which of the following is considered a profitability measure?Days sales in inventoryFixed asset turnoverPrice-earnings ratioCash coverage ratioReturn on Assets2.  Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4.  From this we know thatFirm A has a higher profit margin than firm BFirm B has a higher profit margin than firm AFirm A and B have the same profit marginFirm A has a higher equity multiplier than firm BYou need more information to say anything about the firms profit marginIf a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firms Net Working Capital?$0$100$200$1,000$1,200To measure a firms solvency as completely as possible, we need to considerThe firms relative proportion of debt and equity in its capital structureThe firms capital structure and the liquidity of its current assetsThe firms ability to use Net Working Capital to pay off its current liabilitiesThe firms leverage and its ability to make interest payments on its long-term debtThe firm leverage and its ability to turn its assets over into salesB: Problem Solving QuestionsYou have been hired as an analyst for Mellon Bank and your team is working on an independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the production of freshly imported farm products from France.  Your assistant has provided you with the following data for Flipper Inc and their industry.Ratio1999199819971999- Industry AverageLong-term debt0.450.400.350.35Inventory Turnover62.6542.4232.2553.25Depreciation/Total Assets0.250.0140.0180.015Days’ sales in receivables1139894130.25Debt to Equity0.750.850.900.88Profit Margin0.0820.070.060.075Total Asset Turnover0.540.650.700.40Quick Ratio1.0281.031.0291.031Current Ratio1.331.211.151.25Times Interest Earned0.94.3754.454.65Equity Multiplier1.751.851.901.88In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations.  We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).”  Is the CEO correct?  Explain and use only relevant information in your analysis.What can you say about the firms asset management? Be as complete as possible given the above information, but do not use any irrelevant information. You are asked to provide the shareholders with an assessment of the firms solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.ANSWERS:Answer 1: eAnswer 2: b (Profit margin of firm A=5.33% and for firm B=7.5% – use Du Pont Identity)