Work Through The Web Exercise At The End Of The Chapter

Work through the Web Exercise at The End of The Chapter Comm

Question 1: Work through the web exercise at the end of the chapter. Comment on your most interesting findings on Johnson & Johnson (JNJ).

Question 2: Given the following financial data: Net income/Sales: 4 percent; Sales/Total assets: 2.8 times; Debt/Total assets: 40 percent; compute:

• Return on assets.
• Return on equity.
• If the Debt/Total assets ratio were 70 percent, what would Return on equity be?

Question 3: Discuss several key concepts including asset-utilization ratios, balance sheet, debt-utilization ratios, dividend-payout ratio, dividend yield, profitability ratios, statement of cash flows, trailing price-earnings ratio, trend analysis, and their relevance in financial analysis.

Question 4: Explain why the statement of cash flows is particularly relevant given the use of the accrual method in the income statement and balance sheet, and whether an operating loss on the income statement necessarily implies reduced cash flows.

Question 5: Identify which financial ratios are of greatest interest to a banker or trade creditor, and which are most relevant to bondholders.

Question 6: Comment on the implications if a firm's operating margin and after-tax margin are almost the same; what does this say about the firm?

Question 7: Conduct a review of the heavy capital goods industry and the food-processing industry under the DuPont analysis framework, discussing their performance differences.

Question 8: Discuss how the age of assets affects the interpretation of return on assets when calculating it.

Question 9: If a firm's return on equity significantly exceeds its return on assets, what can an analyst infer about the firm?

Question 10: Explain how asset-utilization ratios relate to liquidity ratios, and whether public utility firms can justify higher debt levels compared to automotive or airline industries, providing reasoning.

Question 11: Analyze why the fixed-charge coverage ratio will always be equal to or less than times interest earned, and what a high dividend payout ratio indicates about a company's growth prospects.

Question 12: Discuss the probable impact of replacement-cost accounting on return on assets, debt to total assets, and times interest earned for firms with substantial old fixed assets.

Question 13: Discuss the major trade-offs involved in capacity planning, who needs to be involved, and how technology influences capacity planning decisions.

Question 14: In a scenario where a computer repair service has a design capacity of 80 repairs/day, effective capacity of 64, and actual output of 62, which factors should the manager investigate to increase repairs per day? Explain.

Question 15: Evaluate how service requirements—being time-dependent, location-dependent, and volatile—pose challenges, and suggest strategies for overcoming these difficulties based on recent business examples.

Question 16: Identify potential unethical actions related to capacity planning and the ethical principles they violate.

Question 17: Calculate utilization and efficiency for a loan processing operation and a furnace repair team based on provided data, and analyze whether higher efficiency ratios always mean higher utilization ratios.

Analysis and Valuation of Equity Securities

This section discusses methods for valuing common stocks based on dividends and earnings per share, emphasizing the importance of accurate forecasts of dividends, earnings, and the required rate of return. Various models such as the dividend discount model, capital asset pricing model (CAPM), and growth-based models are explored, considering factors like future profitability, risk, market conditions, and industry outlooks. The valuation process requires careful assumptions about growth patterns—constant, accelerating, or decreasing—and how these assumptions impact valuation outcomes. The use of price-earnings ratios as a multiplier of EPS is also examined, noting that high P/E ratios often reflect positive future outlooks, whereas low ratios suggest negative expectations. Proper selection and interpretation of these ratios depend on understanding the firm's growth prospects and industry position.

References

• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley Finance.
• Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th ed.). Pearson.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.
• Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
• Graham, B., & Dodd, D. (2008). Security Analysis (6th ed.). McGraw-Hill Education.
• Lev, B. (2001). Intangible Assets: Accounting and Reporting Issues. Handbook of the Economics of Innovation.
• Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill Education.
• Heath, R., & Platt, H. (2010). Understanding Valuation Models: A Guide for Investors. Journal of Portfolio Management, 36(4), 45-62.
• Penman, S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill Education.
• Bloomberg Industry Research. (2020). Industry Reports and Trends Analysis. Bloomberg LP.