Comparative Analysis of Profitability and Financial Leverage
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The problem I am having trouble with is 11.11.
The numbers in the columns are kind of hard to see on the attached file, they are:
Coke Pepsi
Net Revenues $31,994 $43,251
Net Income 5,807 5,142
Total Assets, 01/01/08 43,269 34,628
Total Liabilities, 01/01/08 21,525 17,394
Total Liabilities, 12/31/08 20,047 23,888
Total Stockholders Equity,12/31/08 20,472 12,203.
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Solution Summary
The solution provides a comparative analysis of profitability and financial leverage.
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Part A
The first step in calculating these ratios is making sure that you know the formulas. A trick I use to remember these is that ratios that have the word 'return' in their name have net income in the numerator. This makes sense because net income is an indicator of the return on an investment, assets, equity, etc.
Return on equity (ROE) = Net income / Shareholders' equity
Coke ROE = 5,807 / 20,472 = 0.284 or 28.4%
Pepsi ROE = 5,142 / 12,203 = 0.421 or 42.1%
Return on investment (ROI) = Net income / Average total assets
Average total assets = (beginning of period total assets + end of period total assets) / 2
With the data given, we must calculate ending total assets before we can calculate average total assets. We know that the balance sheet equation (assets = liabilities + shareholders' equity) must hold true, therefore we can use the ending total liabilities and ending shareholders' equity to calculate the ending total ...
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