Homework: Managerial Finance
Learning Outcomes
1) Investigate the role of cash flow, financial analysis and the time value of money in financial decisions.
2) Apply cost of capital to determine the worthiness of capital projects.
Task
Mr. Carlos recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Mr. Carlos performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below :
|
Ratio
|
Island Electric Utility
|
Burger Heaven
|
Fink Software
|
Roland Motors
|
|
Current ratio
|
1.10
|
1.3
|
6.8
|
4.5
|
|
Quick ratio
|
0.90
|
0.82
|
5.2
|
3.7
|
|
Debt ratio
|
0.68
|
0.46
|
0.0
|
0.35
|
|
Net profit margin
|
6.2%
|
14.3%
|
28.5%
|
8.4%
|
Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out, answering the following:
1) What problems might Robert encounter in comparing these companies to one another on the basis of their ratios?
2) Why might the current and quick ratios for the electric utility and the fast food stock be so much lower than the same ratios for other companies?
3) Why might it be all right for the electric utility to carry a large amount of debt, but not the software company?
4) Why wouldn't investors invest all of their money in software companies instead of in less profitable companies?
Format your homework according to the following formatting requirements:
(1) The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
(2) The response also includes a cover page containing the title of the homework, the student's name, the course title, and the date. The cover page is not included in the required page length.
(3) Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.