Financial Statement Analysis Questions
Q1. Finance theory implies that the debt-to-equity ratio should be computed using the market values of debt and equity. However, most financial analysts use book values of debt and equity to compute a firm's financial leverage. What are the limitations of using book values rather than market values for comparing leverage across industries or firms? For what types of industries/firms are book values likely to be most misleading?
Q2. The following table reports (in millions) earnings, dividends, capital expenditures, and R&D for Intel for the period 1990-95:
|
Year
|
Net Income
|
Dividends
|
Capital Expenditures
|
R&D
|
|
1990
|
$650
|
$0
|
$680
|
$517
|
|
1991
|
819
|
0
|
948
|
618
|
|
1992
|
1,067
|
43
|
1,228
|
780
|
|
1993
|
2,295
|
88
|
1,933
|
970
|
|
1994
|
2,288
|
100
|
2,441
|
1,111
|
|
1995
|
3,566
|
133
|
3,550
|
1,296
|
What are the dividend payout rates for Intel during these years?
Is this payout policy consistent with the factors expected to drive dividend policy discussed in the chapter? What factors do you expect would lead Intel's management to increase its dividend payout? How do you expect the stock market to react to such a decision?
Q3. U.S. public companies with "low" dividend payouts have payout ratios of 0 percent or less, firms with "medium" payouts have ratios between 1 an 48 percent, and "high" payout firms have a ratio of 49 percent or more.
Given these data, how would you classify the following firms in terms of their optimal payout policy (high, medium, or low)?
- Successful Pharmaceutical Company.
- Electric Utility.
- Manufacturer of Consumer Durables.
- Commercial Bank
- Start-Up Software Company