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A holder in debt obligation, though does not have any opportunity to share in the economic growth of the firm, is interested in a firm's profitability because it is from revenue that a firm will continue to grow in order to generate cash flow to meet obligations.
Profitability ratios are used to find out the underlying causes of a change in the company's earnings. These ratios show the combined effects of liquidity and asset and debt management on the firm. For purpose of assessing the factors underlying the profitability of the firm, profitability ratios break earnings per share into its basic determinants. Understanding the underlying cause helps us to assess the adequacy of historical profits and to project future profitability.
There are no hard and fast rules to decide a fixed standard for these ratios. The standards for a given ratio vary according to operating characteristics of the company and the business condition that is prevailing at the time of analysis. Ratio analysis does not provide answers to questions but is utilized to raise significant questions requiring further analysis. Ratios should not be viewed in isolation but must be viewed in the context of ratios and facts derived from sources such as statement of cash flow.
DuPont formula is used by equity analysts to assess the determinants of a company's earnings per share (EPS). The probability ratios analyzed to assess EPS are:
Yield Yield represents the actual return on the investments. Different types of yield are discussed below: Coupon Yield: The fixed interest rate on a government security or
Determine the Financial structure of business risk Financial structure shifts toward suppliers of funds recognize a more highly levered position increased financial risk associ
After estimating the cash flows, the next step is to determine the appropriate interest rate that should be used to discount the cash flows. The minimum return re
Complete the financial reporting for each period and develop recommendations using the templates provided. Procedure 1. Read the case study. 2. Complete the financial reports
a) TFC = $1,840 (Rent, Salaries, Admin + Power) (b) BEQ = $1,840 / $16 = 115 child places (c) Graph: Title; Axis labels; TR line; TC line and TFC line accurately drawn and la
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Explain the meaning of - Purchase consideration The type of offer made to target company's shareholders would have a big impact on acceptance. Apparently the price
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