Pelican? Paper, Inc., and Timberland? Forest, Inc., are rivals in the manufactur

Question

Pelican? Paper, Inc., and Timberland? Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the? firms' financial leverage and profitability.

**See Attached Screenshot for Data Table of the two companies**

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.

(1) Debt ratio

?(2) Times interest earned ratio

b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.

?(1) Operating profit margin

?(2) Net profit margin

?(3) Return on total assets

?(4) Return on common equity

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?

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) tem Pelican Paper, Inc Timberland Forest, Inc. Total assets Total equity (all common) Total debt Annual interest Total sales EBIT Earnings available for $9,700,000 8,500,000 1,200,000 120,000 22,000,000 5,500,000 $9,700,000 4,400,000 5,300,000 530,000 22,000,000 5,500,000 common stockholders 3,247,200 3,036,000

Explanation / Answer

Pelican Paper, INC Timberland Forest, INC Debt ratio= Total Debt/Total Asset 12.37% 54.64% times Interest Earned Ratio EBIT/Interest 45.83 Times 10.38 times Profitability ratios Operating Profit/ sales 25% 25% Net Profit Margin = Earnings available for ordinary shareholders/sales 14.76% 13.80% ROA =Net Profit margin   *Total Asset Turnover Ratio 33.48% 31.30% Total Asset Turnover Ratio TOTAL Sales/TOTAL Asset 2.268 2.268 ROE =ROA *FLM 38.17% 68.86% FLM=Total Asset/Common stock Equity 1.14 2.2 Pelican is more profitbale but Timerland has a higher return on equity due to additional financial leverage risk. Timberlands profits are lower because the interest expense was deducted from EBIT. Also, Timberland has a higher debt, lowering stockholder equity, resulting in a higher return on equity

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