# Fin 571 Week 2 Answers

## Fin 571 Week 2 Answers

• Submitted By: mori13
• Date Submitted: 11/06/2013 11:29 AM
• Words: 527
• Page: 3
• Views: 130

4.38 Common-size analysis is used in financial analysis to

b.
c. compare companies of different sizes or compare a company with itself over time.
d.

4.40 DuPont analysis involves breaking return-on-assets ratios into their
d. profit margin and turnover components.

4.3 Haugen Enterprises has an equity multiplier of 2.5. What is the firm's debt ratio?
Equity multiplier = 2.5

Equity multiplier = Total assets/Total equity
2.5 = Total assets/Total equity

The above equaltion shows that in total assets is 2.5 times of total equity which means that if equity is 1 than total assets is 2.5. This also means that if equity is 1 out of 2.5 than debt would be surely 1.5 out of total assets. Thus this results in debt ratio of 2.5/1.5 i.e. 1.67

4.4 Centennial Chemical Corp. has a gross profit margin of 31.4 percent on revenues of \$13,144,680 and EBIT of \$2,586,150. What are the company's cost of goods sold and operating profit margin?

Gross profit margin = 31.4%
Revenues = \$13,144,680
EBIT = \$2,586,150

Cost of goods sold = Revenue - (Gross profit margin*Revenue)
Cost of goods sold = \$13,144,680 - (31.4%*\$13,144,680)
Cost of goods sold = \$9,017,250

Operating profit margin = EBIT/Revenues
Operating profit margin = \$2,586,150/\$13,144,680
Operating profit margin = 0.1968 i.e. 19.68%

18.3 How do the cash flows that are discounted when the WACC approach (FCFF approach) is used to value a business differ from those that are discounted when the free cash flow to equity (FCFE) approach is used to value the equity in a business?

Solution:
The cash flows that are discounted when the WACC approach is used to value a business are calculated in the same way that the cash flows are calculated for a project analysis. These cash flows represent the total cash flows that the business is expected to generate from operations. The cash flows that are discounted when the FCFE approach is used are the...