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Solution Financial Manegment
Solution Financial Manegment
Department: CS & IT
BS CS 4th (A)
Roll NO: 05
a. Calculate the following debt and coverage ratios for the two companies. Discuss their
financial risk and ability to cover the costs in relation to each other.
b. Calculate the following profitability ratios for the two companies. Discuss their profitability
relative to each other.
c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican
Paper? What are the risks that Timberland’s investors undertake when they choose to purchase
its stock instead of Pelican’s?
(a)
Pelican int. Timberland int.
=1,000,000/10,000,000*100 =5,000,000/10,000,000*100
=10% =50%
=6,250,000/100,000 =6,250,000/500,000
(b)
(1)Operating profit margin =Operating profit/Sales*100
=6,250,000/25,000,000*100 =6,250,000/25,000,000*100
=25% =25%
=3,690,000/25,000,000*100 =3,450,000/25,000,000*100
=15% =14%
=3,690,000/10,000,000*100 =3,450,000/10,000,000*100
= 35.9% =34.5%
=41.0% =69.0%
(c) Pelican is more profitable than Timberland, as shown by the higher operating profit
margin, net profit margin, and return on assets. However, the return on equity for Timberland
is higher than that of Pelican.