In the attached files are the questions to be answered and the information neede
ID: 2332867 • Letter: I
Question
In the attached files are the questions to be answered and the information needed to answer them. Answer all parts of the question completely.
Questions: 4-26
4-26:
a) Compute the return on equity (ROE), the times interest earned ratio and the total-liabilities-to-equity ratio for 2010 for the company’s two business segments and the company as a whole. (Use year-end equity for return on equity calculation).
b) What is your overall assessment of the company’s credit risk? Explain. What differences do you observe between the two business segments? Do these differences correspond to your prior expectations given each company’s business model?
c) Discuss the implications of the analysis of consolidated financial statements and the additional insight that can be gained from a more in-depth analysis of primary business segments.
2,384 22,012 21,820 Net cash flow from operating activities . Required a. Compute the current ratio for each year and discuss any trend in liquidity. What additional informa- tion about the numbers used to compute this ratio might be useful in helping you assess liquidity? Explain b. Compute times interest earned, total liabilities-to-equity, and net cash from operating activities to total liabilities ratios for each year and discuss any trends for each. Do you have any concerns about the extent of Verizon's financial leverage and the company's ability to meet interest obligations? Explain. Verizon's capital expenditures are expected to increase substantially as it seeks to respond to com petitive pressures to upgrade the quality of its communications infrastructure. Assess Verizon's liquidity and solvency in light of this strategic direction. c. E4-24 Compute and interpret Coverage, Liquidity and Solvency Ratios (L03) Selected balance sheet and income statement information from CVS Caremark for 2 follows (S millions). CORPURATION (CvS) Total Current Assets Total Current Liabilities Total Pretax Income Interest ExpenseLiabilities Equity 2010. 2009. 2008. $17,706 17,537 16,526 $11,070 12,300 13,490 $5,629 5,913 5,537 $536 525 509 $24,469 25,873 26,386 $37,700 35,768 34,574 Required a. Compute times interest earned ratio for each year and discuss any trends for each. b. Compute the current ratio for each year and discuss any trend in liquidity. Do you believe the com- pany is sufficiently liquid? Explain. What additional information about the accounting numbers comprising this ratio might be useful in helping you assess liquidity? Explain Compute the total liabilities-to-equity ratio for each year and discuss any trends for each. What is your overall assessment of the company's credit risk from the analyses in (a). (b), and (c)? Explain c. d.Explanation / Answer
Solution 4-26)
Return on equity:
Industrial: 9.8% (=$11,644 / $118,936)
Financial: 3.1% (=$2,155 / $68,984)
Total: 9.8% (=$11,644 / 118,936 )
Time interest earned:
Industrial: {$15,166 + $1,600} / $1,600 = 10.48
Financial: {$2,172 + $14,956} / $14,956 = 1.15
Total: {$14,208 + $15,983} / $15,983 = 1.89
Total liabilities to equity:
Industrial: 0.80 (=$95,729 / $118,936)
Financial: 7.81 (=$538,530 / $68,984)
Total: 5.27 (=$627,018 / $118,936)
2) The overall profitability of GE is high because ROE equals 9.8%. Times interest earned of 1.89 is not specifically high, and its total liabilities-to stockholders’ equity is relatively strong at 5.27. Most of the debt, however, is concentrated in the financial services segment. This segment has the profile of a typical financial institution (such as a bank), with more debt levels and lower coverage and profitability. As long as GE’s leases and loans are collectible, the financial subsidiary should face any issues in meeting its debt needs: cash flows received from leases/ loans are typically well matched with the debt payment needs
3) The consolidated financial statements combine the performance as well as financial position of the parent company with all of its subsidiaries. These are blend of financial statements from several companies. This sort of analysis is usually in order to evaluate the financial structure of each segment in regard to its respective business model. In given scenario, the relatively high debt level for GE can be described as a blend of the less financially leveraged manufacturing subsidiary compared to it's highly leveraged financial services subsidiary.
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