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Financial Investment Analysis - Using ratio analysis

Finance Assignment

BUSI 4351 Internship (all sections)

Summer, 2020

Answer one mini case only:

Mini Case # 1:

You are given the following income statement and balance sheet for Starbucks and McDonald Companies.

 StarBucks (SBUX)Mc Donalds (MCD)
Income Statement  
PERIOD ENDING27-Sep-0931-Dec-08
Total Revenue$9,774,600.00$22,744,700.00
Cost of Revenue$4,324,900.00$13,952,900.00
Gross Profit$5,449,700.00$8,791,800.00
Total Operating Expenses$4,887,700.00$1,950,800.00
Operating Income or Loss$562,000.00$6,841,000.00
Income from Continuing Operations  
Total Other Income/Expenses Net$36,300.00-$354,000.00
Earnings Before Interest And Taxes$598,300.00$6,487,000.00
Interest Expense$39,100.00$0.00
Income Before Tax$559,200.00$6,487,000.00
Income Tax Expense$168,400.00$1,936,000.00
Net Income$390,800.00$4,551,000.00
 StarBucks (SBUX)Mc Donalds (MCD)
Balance Sheet   
PERIOD ENDING27-Sep-0931-Dec-08
Cash & Cash Equivalents$599,800.00$1,796,000.00 
Accounts receivable$557,600.00$1,060,400.00 
Inventories$664,900.00$106,200.00 
Other Current Assets$213,500.00$453,700.00 
Total Current Assets$2,035,800.00$3,416,300.00 
Long Term Investments$423,500.00$1,212,700.00 
Property Plant & Equipment$2,536,400.00$21,531,500.00 
Good will$0.00$2,425,200.00 
Other Assets$581,100.00$1,639,200.00 
Total assets$5,576,800.00$30,224,900.00 
Liabilities   
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Accounts Payable$1,192,100.00$2,970,600.00
Short/Current Long Term Debt$200.00$18,100.00
Other Current Liabilities$388,700.00$0.00
Total Current Liabilities$1,581,000.00$2,988,700.00
Long Term Debt$549,300.00$10,560,300.00
Other Long Term Liabilities$400,800.00$1,363,100.00
Deferred long term liability charges$0.00$1,278,900.00
Total Liabilities$2,531,100.00$16,191,000.00
Total Stockholder Equity$3,045,700.00$14,033,900.00
Total Liabilities & Owner's Equity$5,576,800.00$30,224,900.00

Required:

1-    Calculate for both companies: current ratio, acid test ratio, average collection period, account receivable turnover, inventory turnover, total asset turnover, fixed asset turnover, debt ratio, times interest earned, gross profit margin, operating profit margin, operating return on assets and return on equity.

2-    Analyze your results for both companies in terms of liquidity, asset management efficiency, financial leverage and profitability.

3-    What conclusion can you draw if you were given the following two market ratios?

 SBUXMCD
PE ratio17.6715.74
Market to Book Ratio6.146.12

4-    What are the disadvantages of using ratio analysis?

Mini Case # 2:

You have finally saved $10,000 and are ready to make your first investment. You have the following three alternatives for investing that money:

x         Capital Cities ABC, Inc., bonds, which have a par value of $1,000 and coupon interest rate of 8.75%, are selling for $1,314 and mature in 12 years.

x         Southwest Bancorp preferred stock is paying dividend of $2.50 and selling for $25.50.

x         Emerson Electric common stock is selling for $36.75. The stock recently paid a $1.32 dividend, and the firmís earning per share have increased from $1.49 to 3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are 6% for bonds, 7% for the preferred stock, and 20% for the common stock.

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Required:

1.       Calculate the value of each investment based on your required rate of return.

2.       Which investment would you select? Why?

3.       Assume Emerson Electricís managers expect an earnings downturn and a resulting decrease in growth of 3%. How does this affect your answers to parts 1 and 2?

4.       What required rates of return would make you indifferent to all three options.

Mini Case # 3

You have been working for a year as an analyst for an investment company that specializes in serving very wealthy clients. These clients often purchase shares in closely held investment funds with very limited numbers of stockholders. In fall of 2008, the market for certain types of securities based on real estate loans simply collapsed as the subprime mortgage scandal unfolded. Your firm, however, sees this market collapse as an opportunity to put together a fund that purchases some of these mortgage-backed securities, which investors have shunned, at bargain prices and holding them until the underlying mortgages are repaid or the market for these securities recovers.

The investment company has begun putting together sales information concerning the new fund and has made the following predictions regarding its possible performance over the coming year as function of how well the economy does:

State of the Economy Probability Fund Return
Rapid expansion10%50% 
Modest growth50%35% 
No growth40%5% 
Recession5%-100% 

Your boss has asked you to perform a preliminary analysis of the new fundís performance potential for the coming year. Specifically, he has asked you to address the following issues:

Required:

1.       What is the expected rate of return and standard deviation for the fund, given the estimates of fund performance in different states of the economy?

2.       What is the reward-to-risk ratio for the fund based on the fundís standard deviation as a measure of risk?

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3.       What is the expected rate of return for the fund based on the capital asset pricing model (CAPM)?

4.       In addition to the information provided, you have observed that the risk-free rate of interest for the coming year is 4.5%, the market risk premium is 5.5%, and the beta for the new investment is 3.55. based on your analysis, do you think that the proposed fund offers a fair return, given its risk? Explain.

END

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Financial Investment Analysis - Using ratio analysis

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