Accounting 334 – Data Analytics – Excel Exercise
This is a data analytics exercise modified from the one presented in your textbook. We will be usingExcel to perform an analysis of two companies: GPS Corporation and Tru, Inc.Please download the Excel spreadsheet “GPS_Tru_Financials.xls” from the Data Analytics Module onCanvas.
Part 1: For each of the two companies in the most recent five-year period 2017-2021 calculate anddisplay (using the chart option) the trends for the:(a) Debt to equity ratio (Total Debt / Total Equity)(b) Rate of return on assets (Net Income / Total Assets)(c) Rate of return on shareholders’ equity (Net Income / Shareholders’ Equity)
Please make sure to label the charts correctly (including chart title, x-axis, and y-axis). These chartswill be used to answer the next part and will be submitted as supporting material.Part 2: Based on what you find, answer the following questions:1. Which of the two companies finances a higher percentage of its assets by borrowed fundsrelative to funds invested by shareholders as measured by the debt to equity ratio is 2021?2. Which of the two companies indicates higher profitability during the period 2017-2021without regard to the sources of financing as measured by the return on assets ratio?3. Which of the two companies indicates higher effectiveness of employing resources providedby owners during the period 2017-2021 as measured by the return on shareholders’ equityratio?4. Management is using its borrowed funds to enhance the earnings for shareholders of (a) GPSCorporation, (b) Tru, Inc., (c) both firms, or (d) neither firm during the period 2017-2021?Background Information• What does the debt to equity (D/E) ratio tell us? The firm’s capital structure refers to theamount of debt and equity the company uses to finance its operations. D/E ratio is oftentimesused as a measure of risk. All else equal, the higher the D/E ratio, the higher the risk. The riskreferred to here is “default risk” because it indicates the likelihood the company will default onits obligations (if it borrows excessively).However, debt can also create “favorable financial leverage”. If the company can earn a returnon the borrowed funds in excess of the cost of borrowing the funds, then shareholders areprovided with a total return greater than what could have been earned with equity fundingalone. Examining additional ratios will help determine whether the company has a favorablefinancial leverage.
•What does the return on assets (ROA) ratio tell us? ROA (net income/assets) is a measure of the
company’s profitability. It measures profitability without regard to the source of the company’sfinancing (i.e., whether the financing is debt or equity). Remember, Assets = Liabilities Equity,so when we divide by assets we are dividing by debt and equity.You can also think of ROA in terms of how well the company employs its assets. The ratio helpsus answer the following question: for every $1 of asset the company employs, how much netincome does the company generate?• What does the return on shareholders’ equity (ROE) ratio tell us? ROE (net income/shareholders’equity) is also a measure of the company’s profitability. However, it does measure profitabilitywith regard to the source of financing – it looks specifically at the shareholders’ equity (ratherthan debt and equity combined). Doing so, the ROE measures how effective the company is atemploying resources provided by the owners’ of the company.The ratio helps us answer the following question: for every $1 of financing provided byshareholders, how much net income does the company generate?• Does the company have favorable financial leverage? For our purposes, we will consider acompany to have favorable financial leverage if its ROE is greater than its ROA.Assignment Submission:To receive full credit, please upload the assignment, a report in a Word or PDF with:A. Your answers to the above four questions.B. Supporting data and labeled charts associated with the three ratios (debt to equity, return onequity, and return on assets). You will need to copy your chart from Excel (Microsoft ‘snip andsketch’ is an easy tool you can use to avoid any formatting issues).
Good luck! ����
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