Financial Theories

The DuPont Analysis The DuPont analysis begins with an assessment of the component contributions to return-on-investment (ROI). In DuPont analysis, ROI is equal to total asset turnover multiplied by net profit margin. Therefore, ROI in this context is return-on-total assets (ROTA). This analysis leads to a conceptual situation where (1) the more sales that a company can generate for each dollar of resources applied in running the business, (2) and/or the more profit a company earns on each dollar of sales, (3) the greater will be the ROI. . If we divide users of financial ratios into-short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and for what reasons. The DuPont analysis system also is applied to assess ROE. ROE, in the context of the DuPont analysis, is equal to ROI divided by the quotient of total assets divided by shareholder equity. The ROE (return-on-equity) ratio would be of most interest to stock holders because this ratio indicates the assets that are available to stockholders.

Long-term lenders will be more interested in ROI (return-on-investment) because this ratio is one indicator of the long-term viability of the company. Short-term lenders will be more interested in ROTA (return-on-assets) because the combination of net profits and asset turnover is an indicator of a company short-term liquidity. Cats and Dogs, Inc. sells one of its products for $8 per unit. In connection with . . . Money. c. Should the company borrow the money to take the discount? The company should borrow the money to take the discount.

This way, the company will come out $500 ahead. d. If the banker requires a 20% compensating balance, how much must the firm borrow to end up with $300,000? The company needs to borrow $375,000 (300000= X * . 8). Section I Exam: Question 4 Essay The Mercury Corporation issued $100 par value preferred stock 10 years ago. The stock provided an 8% yield at the time of issue. The preferred stock is now selling for $75. What is the current yield or cost? (Disregard flotation costs) Preferred stocks pay a fixed rate of return on par value.

In this case, the annual dividend on the $100 Mercury preferred stock is $8. Ten years later, with a selling price of $75, an investors yield would be 10. 667% (8/75) if the $100 par value stock was purchased for $75. Section I Exam: Question 5 Essay Assume a corporation has earnings before depreciation and taxes of $100,000, and depreciation of $50,000, and it has a 30% tax bracket. Compute the cash flow using the format below. Earnings before depreciation and taxes: $100,000 Depreciation: 50,000 Earnings before taxes.

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