Financial Analysis- Cases

Financial Analysis-Cases

Mini Case

Default Risk Premium = Bond Rate - Treasury Rate

= 5.43 - 2.96

= 2.47

Subtract inflation rate over the life of bond = 6.71 - 2.33

= 4.38

Difference between Risk free rate of the bond yield of 3-months and the inflation rate

= 2.96 -2.33

= 0. 63

Default Risk Premium = Yield AA Rated Bonds - 30 Year Treasury Bond

= 7.73 - 6.89

= 0.84

Maturity Period = Average Yield 30 Year Bond - Average Yield 3 Year Bond

= 6.89 - 4.76

= 2.13

The calculation of liquidity premium will help the investors in finding out the cash they will lose out in case of converting cash into bonds. It is calculated by deducting liquidity premium from liquidity in the bond market.

Default Risk Premium = 0.4 - 0.04

= 0.36

The risk premiums that have deducted inflation from the yields of bonds show that the firm will be able to perform well in the bond market. On the other hand the investors will have to lose a very small amount in case of converting their cash into bonds.

Mini Case- GM Motors and Toyota

Common Size Income Statement and Balance Sheet of Toyota Corporation

Toyota Corporation

Common Size Income Statement

For the Year Ended 2008 and 2009

 

2008

2009

Sales

100%

100%

Cost of Goods Sold

76%

83%

Gross Profit

24%

17%

Selling, general and administrative expense

10%

12%

Depreciation and amortization

6%

7%

Operating Income

8%

-2%

Interest expense

0.20%

0.20%

Noncooperation Income

1%

-2%

Earnings Before tax

10%

0.20%

Net Income (loss)

7%

-2%

Toyota Corporation

Common Size Balance Sheet

Assets

2008

2009

Cash

7%

10.20%

Receivables

21%

19%

Inventories

6%

5%

Other Current assets

3.30%

4%

Total Current Assets

37%

39%

Gross Fixed Assets

53.50%

59%

Accumulated Depreciation and Amortization

30%

34%

Net Fixed Assets

24%

25%

Other Assets

39%

36%

Total Assets

100%

100%

 

 

 

Liabilities

 

 

Notes Payable

22%

16%

Accounts Payable

11%

5%

Income Tax Payable

0.01%

0.01%

Accrued Expenses

8%

5%

Other Current Liabilities

16%

10%

Total Current Liabilities

58%

36%

Long term Debt

2%

2%

Differed Taxes

3%

2%

Other Liabilities

5%

5%

Total Liabilities

63%

65%

 

 

 

Equity

 

 

Common Stock

1%

1%

Capital Surplus

2%

2%

Retained Earnings

38%

35%

Less: Treasury Stock

4%

4%

Total Common Equity

37%

41%

Total Liabilities and Equities

100%

100%

Common Size Income Statement and Balance Sheet of General Motors

General Motors

Common Size Income Statement

For the Year Ended 2007 and 2008

 

2007

2008

Sales

100%

100%

Cost of Goods Sold

89%

100%

Gross Profit

11%

0%

Selling, general and administrative expense

8%

0.02%

Depreciation and amortization

5%

1%

Operating Income

3%

17%

Interest expense

2.00%

2.00%

Noncooperation Income

1%

1%

Taxable Income

3%

20%

Income taxes

21%

1%

Income before extraordinary items

24%

21%

extra ordinary items

2%

0%

Net Income (loss)

22%

21%

General Motors

Common Size Balance Sheet

Assets

2007

2008

Cash

18%

15.00%

Receivables

6%

8%

Inventories

10%

14%

Other Current assets

6.00%

7%

Total Current Assets

41%

45%

Gross Fixed Assets

65.00%

95%

Accumulated Depreciation and Amortization

32%

50%

Net Fixed Assets

33%

46%

Other Assets

26%

9%

Total Assets

100%

100%

 

 

 

Liabilities

 

 

Notes Payable

4%

17%

Accounts Payable

20%

24%

Income Tax Payable

23.00%

39.00%

Accrued Expenses

4%

2%

Other Current Liabilities

51%

83%

Total Current Liabilities

22%

33%

Long term Debt

32%

32%

Differed Taxes

8%

28%

Other Liabilities

12%

20%

Total Liabilities

125%

194%

 

 

 

Equity

 

 

Common Stock

0.06%

1%

Capital Surplus

10%

17%

Retained Earnings

-35%

-113%

Total Common Equity

25%

95%

Total Liabilities and Equities

100%

100%

Each company was making the following Profit and Loss in each year compared to the sales of the firm:

Toyota Corporation

2008

2009

Sales

$ 262,394

$ 208,995

Profit (or loss)

$ 17,146

$ (4,448)

General Motors

2007

2008

Sales

$179,984

$ 148979

Profit (loss)

$ 38732

$ (30860)

The attribute due to which there is differences in each of the firms income and loss is the year and secondly GM have 100% of cost incurred to their sales generated that has caused the major difference in the two statements profits and losses.

The problems noticed in the common size statements of both the firms is that GM are incurring cost 100% to the sales they generate. The other problem in the statement of GM is the amount of liabilities that are far more than the assets owned by the company which creates questions on the liquidity of the firm. Third thing that I noticed is the increasing amount of negative retained earning against the assets invested ...