Module 4 Assignment

Question 1

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Question text

Compute and Interpret Coverage, Liquidity and Solvency Ratios

Selected balance sheet and income statement information from Amazon for 2016 through 2018 follows.

$ millions	2018	2017	2016
Net operating profit after tax (NOPAT)	$10,978	$3,222	$2,556
Net income	10,073	3,033	2,371
Operating profit	12,421	4,106	4,186
Interest expense	1,417	848	484
Cash from operating activities	30,723	18,365	17,203
Current assets	75,101	60,197	45,781
Current liabilities	68,391	57,883	43,816
Cash and cash equivalents	31,750	20,522	19,334
Marketable securities	9,500	10,464	6,647
Total debt	23,495	24,743	7,694
Assets	162,648	131,310	83,402
Liabilities	119,099	103,601	64,117
Equity	43,549	27,709	19,285
Net operating assets (NOA)	25,794	21,466	998

a. Compute profitability measures RNOA and ROE for 2018 and 2017. In which year are the measures stronger? Round answers to one decimal place (ex: 0.2345 = 23.5%).

b. Compute coverage metrics Times interest earned and Cash from operating activities to total debt for 2018 and 2017. Round answers to two decimal places.

c. Determine liquidity for the company for 2018 and 2017 by computing the current ratio and quick ratio.
Round answers to two decimal places.

d. Compute the Total liabilities‑to‑equity ratio and the Total debt to equity ratio for 2018 and 2017.
Round answers to two decimal places.

Solution

a. Compute profitability measures RNOA and ROE for 2018 and 2017. In which year are the measures stronger?

b. Compute coverage metrics Times interest earned and Cash from operating activities to total debt for 2018 and 2017.

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Question 2

Question text

Compute and Interpret Ratios

Selected balance sheet and income statement information from Illinois Tool Works follows.

$ millions	2019	2018	2017
Net operating profit after tax (NOPAT)	$2,610	$2,711
Net income	2,521	2,563
Total assets	15,068	14,870	$16,780
Equity	3,026	3,254	3,254
Net operating profit after tax (NOA)	8,869	9,462	10,089
Treasury stock	18,982	17,545	15,562

a. Compute profitability measures: RNOA, ROA and ROE for 2019 and 2018 using the numbers as reported by the company.

Note: Round answers to one decimal place (ex: 0.2345 = 23.5%).

b. Adjust equity and total assets for the amount of treasury stock.

Using these restated numbers, recompute RNOA, ROA and ROE for both years.
Note: Round answers to one decimal place (ex: 0.2345 = 23.5%).

c. Which profitability measures (from part a or part b) better reflect the company’s profit levels during the two years?
Of the three measures, which one is least influenced by the company’s stock repurchase activity?

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Question 3

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Compute and Interpret Altman’s Z-scores

Following is selected financial information for Netflix, for 2018 and 2017.

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

In thousands, except per share data	2018	2017
Current assets	$9,694,135	$7,669,974
Current liabilities	6,487,320	5,466,312
Total assets	25,974,400	19,012,742
Total liabilities	20,735,635	15,430,786
Shares outstanding	436,599	433,393
Retained earnings	2,942,359	1,731,117
Stock price per share	268.00	191.96
Sales	15,794,341	11,692,713
Earnings before interest and taxes	1,605,226	838,679