Page 83 - Financial Statement Analysis

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60 Financial Statement Analysis

Best Computer Industry Average

Operating performance
Gross profit margin . . . . . . . . . . . . . . . 36.0% 34.3%
Operating profit margin . . . . . . . . . . . 16.7% 15.9%
Pre-tax profit margin . . . . . . . . . . . . . . 14.9% 14.45%
Net profit margin . . . . . . . . . . . . . . . . . 8.2% 8.0%
Asset utilization
Cash turnover . . . . . . . . . . . . . . . . . . . 40.8 38.9
Accounts receivable turnover . . . . . . . 6.90 8.15
Sales to inventory . . . . . . . . . . . . . . . . 29.9 28.7
Working capital turnover . . . . . . . . . . . 8.50 9.71
Fixed asset turnover . . . . . . . . . . . . . . 15.30 15.55
Total assets turnover . . . . . . . . . . . . . . 3.94 3.99
Market measures
Price-to-earnings ratio . . . . . . . . . . . . 27.8 29.0
Earnings yield . . . . . . . . . . . . . . . . . . . 8.1% 7.9%
Dividend yield . . . . . . . . . . . . . . . . . . . 0% 0.5%
Dividend payout rate . . . . . . . . . . . . . . 0% 2%
Price-to-book . . . . . . . . . . . . . . . . . . . . 8.8 9.0

Required:
a. Interpret the ratios of Best Computer and draw inferences about the company’s financial performance and
financial condition—ignore the industry ratios.
b. Repeat the analysis in (a) with full knowledge of the industry ratios.
CHECK c. Indicate which ratios you consider to deviate from industry norms. For each Best Computer ratio that deviates
Acct. recble., Above norm from industry norms, suggest two possible explanations.

PROBLEM 1–12 Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the share-
Equity Valuation holders of Ace the book value per share at the time of the takeover. A reliable analyst makes the
following projections for Ace (assume cost of capital is 10% per annum):

($ per share) 2002 2003 2004 2005 2006 2007
Dividends . . . . . . . . . . . . . . . . — $1.00 $1.00 $1.00 $1.00 $1.00
Operating cash flows . . . . . . . — 2.00 1.50 1.00 0.75 0.50
Capital expenditures . . . . . . . — — — 1.00 1.00 —
Debt increase (decrease) . . . . — (1.00) (0.50) 1.00 1.25 0.50
Net income . . . . . . . . . . . . . . . — 1.45 1.10 0.60 0.25 (0.10)
Book value . . . . . . . . . . . . . . . 9.00 9.45 9.55 9.15 8.40 7.30

CHECK Required:
(b) Value using RI, $8.32
a. Estimate Ace Co.’s value per share at the end of year 2002 using the dividend discount model.
b. Estimate Ace Co.’s value per share at the end of year 2002 using the residual income model.
c. Attempt to estimate the value of Ace Co. at the end of year 2002 using the free cash flow to equity model.