Week 8 CheckPoint 1 Analyzing Financial Data Ch 6 Pg 232 6 6 Alternative 1 Debt Alternative 2 Equity Debt 12 Interest Equity 50 000 000 40 000 000 50 000 000 60 000 000 Sales Cost of goods sold Gross profit Operating expenses Operating profit Interest expense Earnings before tax Income tax expense 40 Net income Number of Shares Issued Return on Equity Return on Assets 18 000 000 18 000 000 6 300 000 4 800 000 11 700 000 13 200 000 4 680 000 5 280 000 7 020 000 7 920 000 800 000 1 000 000 14 04 10 80 13 20 Net Income Total Equity 10 80 A Debt Ratio Times Interest Earned Earnings per share Financial Leverage Index 50 2 86 8 78 1 3 40 3 75 7 92 1 2 Total Debt Total Debt Total Equity Operating Profit Interest Expense Net Income Number of Shares Issued Return on Equity Return on Assets B Factors to be considered when making the decision 1 Adding debt would result in additional risk which would in turn cause decline in price to earning ratio This would then possibly decrease share price 2 Consider the marketability of stock based on current future availability of credit sources and interest rate expectations 3 Assess the liquidity of the company Are they able to pay both short term and long term liabilities as those come due 4 Review the rationality of projection for operating profit review past earnings stream 5 Consider stockholders return they expect to receive in addition to the minimum they expect per share owned Net Income Total Equity Total Debt Total Debt Total Equity Operating Profit Interest Expense Net Income Number of Shares Issued Return on Equity Return on Assets 1 Adding debt would result in additional risk which would in turn cause decline in price to earning ratio This would then possibly decrease share price 2 Consider the marketability of stock based on current future availability of credit sources and interest rate expectations 3 Assess the liquidity of the company Are they able to pay both short term and long term liabilities as those come due 5 Consider stockholders return they expect to receive in addition to the minimum they expect per share owned
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