Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 3, Problem 3MC
Summary Introduction
Case summary:
The financial statements of Company C and P for 2017 and 2018 are given.
To discuss: Differences identified by person X in both common-sized balance sheets that indicates one of the firms doing better than the other.
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Please see the attached graph for questions below.
What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other?
Are there economic or end-market influences that explain why the ratios differ? What might they be?
Over time, is each company’s overall financial performance improving, declining, or is something strange going on?
Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis?
Explain why balance sheet accounts are generally “averaged” and income statement figures are just lifted from the income statement when using them as factors in a particular financial statement ratio?
How do the DuPont technique helps the firm’s managers to further analyze its returns?
Any difference in the financial statements for financial firms compared to non financial firms?
Chapter 3 Solutions
Foundations Of Finance
Ch. 3.A - (Computing free cash flows) Given the following...Ch. 3.A - Prob. 2SPCh. 3.A - Prob. 3SPCh. 3.A - Prob. 4SPCh. 3 - A companys financial statements consist of the...Ch. 3 - How do gross profits, operating profits, and net...Ch. 3 - How do dividends and interest expense differ?Ch. 3 - Why is it that the preferred stockholders equity...Ch. 3 - Prob. 5RQCh. 3 - Prob. 6RQ
Ch. 3 - Prob. 7RQCh. 3 - Prob. 8RQCh. 3 - Prob. 9RQCh. 3 - Prob. 1SPCh. 3 - Prob. 2SPCh. 3 - (Preparing an income statement) Prepare an income...Ch. 3 - (Preparing a balance sheet) Prepare a balance...Ch. 3 - Prob. 5SPCh. 3 - Prob. 6SPCh. 3 - Prob. 7SPCh. 3 - (Working with income statement and balance sheet)...Ch. 3 - (Working with a statement of cash flows) Given the...Ch. 3 - Prob. 10SPCh. 3 - Prob. 11SPCh. 3 - Prob. 12SPCh. 3 - Prob. 13SPCh. 3 - Prob. 14SPCh. 3 - Prob. 15SPCh. 3 - Prob. 16SPCh. 3 - Prob. 1MCCh. 3 - Prob. 2MCCh. 3 - Prob. 3MC
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- Which of the following is NOT a tool to measure firm performance? O Return on equity. O Economic value. Market capitalization. Firm branding.arrow_forwardWhich of the following statements regarding the current ratio is true? a.The current ratio is more useful than working capital in making comparisons across companies. b.The current ratio is not useful in making comparisons with industry averages. c.Working capital is more useful than the current ratio in making comparisons across companies. d.All of these statements are true.arrow_forward1.) What value due financial ratios offer investors in reviewing the financial performance of firms?arrow_forward
- What is the usefulness of using Ratio analysis in financial reporting? What is industry average? How it benefits?arrow_forwardWhy is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?arrow_forwardWhich of the following is NOT a type of ratio analysis used by managers to interpret the numbers in financial statements? O liquidity O operating O activity O profitabilityarrow_forward
- Using the data in the following table for a number of firms in the same industry, dothe following:•a. Compute the total asset turnover, the net profit margin, the equity multiplier, andthe return on equity for each firm.b. Evaluate each firm’s performance by comparing the firms with one another.Which firm or firms appear to be having problems? What corrective actionwould you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting youranalyses?Firm (in million Dollars A B C D Sales $20 $10 $15 $25 Net Income after sales 3 0.5 2.25 3 Total Assets 15 7.5 15 24 Stockholders’ Equity 10 5 14 10arrow_forwardTo evaluate a company’s performance, investors need a benchmark to which they can compare its financial ratios. What are some of the problems associated with these comparisons?arrow_forwardWhich is not a potential problem of utilizing ratio analysis? A. trends and industry averages are historical in nature. B. financial data may be distorted due to price-level changes. C. firms within an industry may not use similar accounting methods. D. all of the above E. answer not givenarrow_forward
- What is the basic purpose for examining trends in a company’s financial ratios and other data? What other kinds of comparisons might an analyst make?arrow_forwardWhat limitations does the balance sheet have in respect to evaluating the health of the firm?arrow_forwardWhen converting dollar amounts on our financial statements to percentages for vertical analysis, what is it that makes this an easier way to compare companies to each other? A It provides a way for outside stakeholders to understand the numbers better in an easier format B It forces us to look closer at our financial statements to ensure we don't have missing amounts C It allows us to compare things based on growth or decline easier than comparing dollar amounts that could be vastly different values D It allows the analysis of numbers too large to comprehend by most stakeholdersarrow_forward
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