Company Basics and Financial Ratios – Part 2Question 1Using the most recent three years of available data compute Wal-Mart’s and Target’s degree of operating leverage. You will have to use the formula percentage change in pretax income divided by percentage change in revenues. Show your work.DOL = %Change in EBIT / % Change in sales2015 = 17.88% / 1.9% = 9.41% Wal-Mart2014 = 17.7% / 1.6% = 11.06% Wal-Mart2013 = 16.9% / 5% = 3.38% Wal-Mart2014 = 6.6% / 1.3% = 5.07% Target2013 = 7% / -.4% = 17% Target2012 = 7.8% / 2.7% = 2.88% TargetQuestion 2Using the last three years of available data compute Wal-Mart’s and Target’s degree of financial leverage. You will have to use the formula percentage change in net income divided by percentage change in pretax income (EBIT). Show your work.Change of net income / EBIT = DOFL2015 = 19.4% / 17.88% = 1.085% Wal-Mart2014 = 19.3% / 17.7% = 1.09% Wal-Mart2013 = 19.0% / 16.9% = 1.12% Wal-Mart2014 = 29.4% / 6.6% = 4.45% Target2013 = 29.8% / 7% = 4.26% Target2012 = 29.7% / 7.8% = 3.8% TargetQuestion 3With each company multiply the degree of financial leverage times the degree of operating leverage to determine the degree of combined leverage for the two periods.Question 4Compare the leverage ratios. Did the degrees of leverage stay the same? Explain the differences between the two periods.Question 5Go to finance.yahoo.com and get the quotes of Target and Wal-Mart. (Type into the “Get Quotes” box. Click on the “Profile” section on the home page and write a few sentences of each firm’s activities.Write down each firm’s P/E ratio. Calculate the PEG ratio (the P/E ratio divided by annual growth).Which firm’s ratios are higher?Is the stock of each company up or down from the prior day? (See “change” on the home page.)What is each company’s 52-week range?Scroll down and click on “Analysts Opinion.” What is the Mean Target the High Target and the Low Target? How many brokers follow each firm?Question 6a.)With each company compute the $ change in “Total Assets” over the last two years.b.) Do the same computation for “Stockholders’ Equity.”c.) Do the same computation for “Long-Term Debt.”d.) In a brief paragraph describe the changes in total assets stockholders’ equity and long-term obligations. Do these changes appear to affect the firm? Describe.Question 7Find the long-term debt and total common equity for the last 2 years. Add the two together to get total capital.a.) Calculate the weights between long term debt and equity that you would use in a weighted average cost of capital calculation.b.) What are the weights for long term debt and equity for the last five years? Have they remained stable? Comment on the stability or lack of stability and how it would affect the company’s cost of capital
