Question

In: Finance

Please explain the following terms: Ratio analysis (all ratios) The DuPont identity Pro forma statements (Ignore...

Please explain the following terms:

Ratio analysis (all ratios)

The DuPont identity

Pro forma statements

(Ignore percent of sales and EFN)

Internal growth rate vs sustainable growth rate

FV, PV, NPV

Multiperiod case

FV and compounding

PV and discounting

Implied interest rate

Solutions

Expert Solution

A)

Ratio analysis is stated as the process of evaluating and comparing the financial date by determining the meaningful financial statements percentages rather than comparing the line items for every financial statement

Current ratio. This ratio makes comparison between the current assets to current liabilities, to determine if the firm has sufficient cash for paying its immediate liabilities.

  • Days sales outstanding. This ratio evaluates the ability of the company to effectively issue the credit to clients and to be paid back on the basis of time.
  • Debt to equity ratio. This ratio makes comparison between the proportion of debt to equity, to determine if the firm has taken on too much of the debt.
  • Dividend payout ratio. This ratio is stated as the percentage of the earnings which is paid to the investors in the form of dividends. If the value of the percentage is low, it states that there is room for making the payment of the dividend so as to raise substantially.
  • Gross profit ratio. This ratio evaluates the proportion of the earnings which was generated by the sale of products or services, before including the administrative expenses. A downfall in this states pricing the pressure on a firms's core operations.
  • Inventory turnover. This ratio evaluates the time which is taken to sell the inventory. A low turnover figure states that a firm has an enough investment in inventory, and thus is at risk of having the obsolete inventory.
  • Net profit ratio. This ratio determines the proportion of the net profit to sales; a low proportion states a cost structure which is bloated.
  • Price earnings ratio. This ratio compares the price which is paid for a firm's shares to the earnings that is stated by the company. High ratio states that there is no basis for the increase in stock price, that could state a decline.
  • Return on assets. This ratio evaluates the ability of the management to efficiently use the assets for generating the profits.

B)

The DuPoint identity is defined as the expression which states that the return of equity of the business are stated as the product of total asset turnover, equity multiplier and profit margin

C)

The Proforma statements show the impact of the changes on the financial position of the firm which is displayed as the income statement, statement of cash flow and balance sheet statements. The example stated as when the management creates the proforma statements for gauging the effects of the capable joint venture or merger.

D)

The internal growth rate is stated as the formula for determining the maximum growth rate which a company can attain without going for external financing.

Sustainable growth is stated as the annual percentage of the rise in the sales which is consistent with a definite financial policy.

E)

The future value is stated as the value of the current asset at a particular date in some future time period which is relied on the assumed rate of growth.

The present value is stated as the current value of the future sum of the money which is given at a particular rate of return.

The net present value is stated as the difference between the present value of cash inflows and present value of cash outflows over the given period of time.

F)

Multi-period is defined on the assumption that the intrinsic value of the stocks is equivalent to the sum of all the future cash flows which are discounted back to their present values.

G)

Future value = P x (1 + r/n)nxm

Where,

P is the present value or the principal amount

R is the annual interest rate

N is stated as the number of years invested.

m is stated as the number of compounding periods per year

FV is stated as the future value, stating the amount of the principal which grows to after the y years

H)

The present value is stated as the current value of the future sum of the money which is given at the particular rate of return. The discounting is stated as the process which determines the present value of the stream of the payments which are to be obtained in future.

I)

Implied interest is defined as the difference between the forward or futures rate and the spot rate on the transaction. When the future or forward rate is higher than the spot rate, it means that the rate of interest will rise in future.


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