Exercise 2

Question 1

Long-term debt /
solvency analysis examines…

Answer 1

• the firms capital structure
• financing sources
• ability to satisfy long-term debt

Question 2

Profitability
analysis measures…

Answer 2

…the firms income
relative to its
revenues and invested capital

Question 3

Ratios for long term debt and solvency analysis are…

Answer 3

• Debt Ratios
• Interest coverage ratios
• Capital expenditures and CFO-to-debt ratios

Question 4

Ratios for profitability analysis: return on sales, are…

Answer 4

1. Gross (profit) margin
2. Profit Margin
3. Operating margin
4. Margin before interest & Tax

Question 5

Ratios for profitability analysis: return on investment, are…

Answer 5

1. Return on Assets
2. Return on Capital
3. Return on Equity

Question 6

the main four categories of ratio analysis are:

Answer 6

1. Activity analysis
2. Liquidity analysis
3. Long-term debt / solvency analysis
4. Profitability analysis

Question 7

Debt to total Capital

Answer 7

= Total Debt / Total capital (debt & equity)

Question 8

Debt to equity

Answer 8

= Total Debt / Total Equity

Question 9

Interest coverage ratio

Answer 9

Times interest earned = EBIT / Interest Expenses

Question 10

Capital Expenditure Ratio

Answer 10

CFO / CapEx

Question 11

CFO to Debt

Answer 11

CFO / Total Debt

Question 12

Gross Profit Margin

Answer 12

= Gross Profit / Sales

Question 13

Operating Margin

Answer 13

= Operating Income / Sales

Question 14

Return on assets (Pretax)

Answer 14

ROA = EBIT / Avg. Tot. Assets

Question 15

Return on Capital (after-tax)

Answer 15

(Net Income + After Tax Interest Cost) / Avg. Tot. Assets

Question 16

Return on total Capital

Answer 16

ROTC = EBIT / Average (tot. Debt + Stockholders Equity)

Question 17

ROE (pretax)

Answer 17

= Pretax Income / Avg. Stockholders Equity

Question 18

Calculation of EBIT

Answer 18

Net sales
- COGS (w/o dep. amor)
=Gross Profit

• Selling, General, administrative
• Research & development
  + - other Income / expenses
  =EBITDA
• Dep. amor
  =EBIT

+ interest and other financial income
- interest and other financial expenses
= EBT

• income taxes
  = Net profit

Question 19

Total debt consists of…

Answer 19

• short term debt
• long term debt

Question 20

total capital consists of…

Answer 20

• total debt
• total equity

Question 21

implication of Gross (profit) margin

Answer 21

Relationship between sales and manufacturing costs

Question 22

implication of operating margin

Answer 22

profitability from operations

Question 23

implication of margin before interest & tax

Answer 23

independent of finance and tax position

Question 24

implication of profit margin

Answer 24

net of all expenses

Question 25

implication of ROA after-tax

Answer 25

takes into account the tax shield

Question 26

WCR =

Answer 26

current assets - NIBL

Question 27

IC =

Answer 27

• long term assets + WCR
  or
• total assets - NIBL