CHAPTER 3 Understanding Financial Statemer 3-18. (Computing income taxes) Sander
ID: 2491062 • Letter: C
Question
CHAPTER 3 Understanding Financial Statemer 3-18. (Computing income taxes) Sandersen, Inc. sells minicomputers. During the past vear, the company's sales were $3 million. The cost of its merchandise sold came to s2 million, and cash operating expenses were $400,000; depreciation expense was 5100,000, and the firm paid $150,000 in interest on its bank loans. Also, the corpora- tion paid $25,000 in the form of dividends to its own common stockholders. Calculate the corporation's tax liability. Mini Case This Mini Case is available in MyFinanceLab. Below are the financial statements for two firms, Time Warner and Walt Disney, for 2012 and 2013. How did Time Warner's profit margins change from 2012 to 2013? To what b. Compare the profit margins between Time Warner and Disney. How are they c. What differences do you notice in the common-sized balance sheets that might d. Conduct an Internet search on the two firms to gain additional insights as to would you attribute the differences? Answer the same question for Disney different? How would you explain these differences? indicate that one of the firms is doing better than the other? causes of the financial differences between the firms in 2012 and continuing into 2013 e. How are the two companies doing financially today? Time Warner, Inc. Annual Income Statement and Common-Sized Income Statement for Years Ending December 31, 2012 and December 31, 2013 (in $millions except earnings per share) 2012 Percentage of SalesDollars $29,795 Dollars $28,729 Sales Cost of goods sold Gross profits Selling, general, and administrative expenses Depreciation and amortization Other operating expenses Operating income 100.0% (55.5% 44.5% (22.0%) (0.9%) 16 $12,795 (6,333) (248) 296 5,918 (1,253) $13,565 (6,46 (25 6,6 20.6% (44%)Explanation / Answer
PART A:-
Time Warner
Profit Margin = Net income / Sales
= 10.2%(2012) and 12.4%(2013)
The reason for the differences in the profit margin which leads to increase in profit from 2012 to 2013 are explained through a statement below
(expressed in % of sales)
Profit margin in 2012 10.2
add:
Decrease in cost of goods sold (increases profit as cost decreases) 1 (55.5 - 54.5)
Decrease in selling,general and administration expenses (increases profit as cost decreases) 0.3 (22 - 21.7)
Depreciation expenses (increases profit as cost decreases) 0.1 (0.9 - 0.8)
Other operation expenses (increases profit as cost decreases) 0.2 (1 - 0.8)
Interest expenses (increases profit as cost decreases) 0.4 (4.4 - 4)
Non operating income loss adjustment 0.4 (0.8 - 0.4)
less:
income tax (profit margin decreases with increase in expense) 1 (5.3 - 5.4)
profit margin of 2013 12.4
WALT DISNEY
Profit Margin = Net income / Sales
= 15%(2012) and 14%(2013)
The reason for the differences in the profit margin which leads to decrease in profit from 2012 to 2013 are explained through a statement below
(expressed in % of sales)
Profit margin in 2012 15
less:
Increase in selling,general and depreciation expenses (decreases profit as cost increases) 1
profit margin of 2013 14
PART B:-
When compared between time warner and walt disney's profits, profit margin increased to time warner and decreased to walt disney for the following reasons
1.Looking at profit statement of Time walter some efforts were made by Time walter in decreasing the cost of expenses as each and every cost got decreased up to some extent as explained in part A (for level of decrease in expenses) whereas it seems no efforts were made by walt disney to decrease its cost infact one of its cost i.e. selling,general and depreciation expenses got increased.
PARTC:-
determining some ratios of both the companies
Time warner
1 current ratio 2012 2013
Current assets(Receivables, cash, inventory) 13264 12844
Current liabilities(payables,shortterm debt) 9799 8383
Current ratio (current assets / current liabilities) 1.35 1.53
2. Inventory to sales ratio
Inventory 2036 2028
sales 28729 29795
Inventory/sales ratio 0.07 0.068
3.capital structure ratio
total assets 68025 67994
total liabilities 38292 38090
total assets / total liabilities 1.776 1.785
in all the above positions company showed its growth
For walt disney doing ratio test
1 current ratio 2012 2013
Current assets(Receivables, cash, inventory) 13709 14109
Current liabilities(payables,shortterm debt) 12813 11704
Current ratio (current assets / current liabilities) 1.07 1.205
2. Inventory to sales ratio
Inventory 1537 1487
sales 42278 45041
Inventory/sales ratio 0.036 0.033
3.capital structure ratio
total assets 74898 81241 total liabilities 35139 35813 total assets / total liabilities 2.13 2.26
BY COMPARING BOTH COMPANIES RATIOS
The Walt disney is financially strong in capital structure compared to Time warner as its 2013 capital structure ration is 2.26 whereas time warner 2013 capital structure is 1.78
But as per the sales and earning profits Time warner is performing well as its current asset ratios are more than disney.
And also we can compare the return on equity for both companies
RETURN ON EQUITY = NET INCOME / STOCK EQUITY
TIME WARNER 2012 2013
Net income 2922 3691
stock equity 29796 29904
return on equity 9.8% 12.34%
WALT DISNEY 2012 2013
Net income 6173 6636
stock equity 39759 45429
return on equity 15.5% 14.6%
When compared based on return on equity time warner is best as it its ROE increases but walt disney ROE decreased.
PART E:-
P/E (ttm)
5-year PEG
P/S (ttm)
ROE (ttm)
Fwd. annual dividend yield
Disney
21.1
1.2
3.1
16.6%
1%
Time Warner
17.1
1.1
2.1
15.6%
1.6%
Advantage
Time Warner
Time Warner
Time Warner
Disney
Time Warner
based on the above table On some basis time warner is better and on other terms Disney is better but the Disney shows the steady growth and decent growth commitment plans it is preferred to invest in Disney.
P/E (ttm)
5-year PEG
P/S (ttm)
ROE (ttm)
Fwd. annual dividend yield
Disney
21.1
1.2
3.1
16.6%
1%
Time Warner
17.1
1.1
2.1
15.6%
1.6%
Advantage
Time Warner
Time Warner
Time Warner
Disney
Time Warner