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Part 1 Overview

Comparing ROE and ROA Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why? 9. Ratio Analysis Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it be mote useful than ROA in comparing two companies? 10. Return on Investment A ratio that is becoming more widely used is return on investment. Return on investment is calculated as net income divided by long-term liabilities plus equity. What do you think return on investment is intended to measure? What is the relationship between return on investment and return on assets? Use the following information to answer the next five questions: A small business called The Grandmother Calendar Company began
The company maintains a constant 30 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained assuming no new equity is issued? 6. Sustainable Growth If the Lay la Corp. has a 15 percent ROE and a 10 percent payout ratio, what is its sustainable growth rate? 7. Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover = 1.90 Profit margin = 8.1% Equity multiplier = 1.25 Payout ratio = 30% 8." Calculating EFN The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes):
[ Income Statement Sales Costs Net income $5,700 3,820 ' $1,880 Total $14,100 Assets Balance Sheet $14,100 Debt Equity Total * $ 6,300 I 7,800 I $14,100 |

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Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $6,669. What is the external financing needed? External Funds Needed Cheryl Colby, CFO of Charming Florist Ltd., has created the firm's pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $390 million. Current assets, fixed assets, and short-term debt are 20 percent,