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Pally is using leverage more effectively? Explain. The The following ratios are available for Rogers Communications...

Question

Pally is using leverage more effectively? Explain. The The following ratios are available for Rogers Communications...

pally is using leverage more effectively? Explain. The The following ratios are available for Rogers Communications Inc. and
pally is using leverage more effectively? Explain. The The following ratios are available for Rogers Communications Inc. and Shaw Communications Inc. PI8- for a recent year: ns Inc. and Shaw Communications Inc. Evaluate ratios. (LO 4,5,6) AN Rogers Shaw 0.48:1 0.36:1 0.81:1 8.3 times 10.7 times 0.95:1 Liquidity Current ratio Acid-test ratio Receivables turnover Solvency Debt to total assets Interest coverage Profitability Profit margin Asset turnover Return on assets Return on equity 79.3% 3.3 times 63.7% 5.5 times 10.4% 0.5 times 5.4% 26.4% 16.9% 0.4 times 6.8% 19.0% Instructions (a) Which company is more liquid? Explain. (b) Which company is more solvent? Explain. (c) Which company is more profitable? Explain. TAKING IT FURTHER Rogers' price-earnings ratio is 17.4 times, compared with Shaw's price-earnings ratio of 13.7 times. Which company do investors favour? Is your answer consistent with your analysis of the two compa. nies' profitability in part (c)?

Answers

Part A:

Answer (a):

Shaw is more liquid. Shaw's liquidity ratios are better as compared to Roger's.

Shaw's current ratio is higher at 0.95 as compared to Roger's current ratio of 0.48.

Shaw's acid-test ratio is higher at 0.81 as compared to Roger's acid-test ratio of 0.36

Shaw has better receivable turnover at 10.7 as compared to Roger's receivable turnover of 8.3

Answer (b):

Shaw is more solvent.

Shaw's debt to total asset ratio is lower at 63.7% as compared to Roger's debt to total asset ratio of 79.3%.

Shaw has better interest coverage of 5.5 times as compared to Roger's interest coverage of 3.3 times.

Answer (c):

Shaw is more profitable.

Shaw's profit margin is better at 16.9% as compared to Roger's profit margin of 10.4%

Shaw's return on asset is better at 6.8% as compared to Roger's profit margin of 5.4%. This is in spite of Shaw having a lower asset turnover.

On return of equity Rogers is better at 26.4% as compared to Shaw's ROE of 19.0%. But this is due to higher leverage of Rogers.

Part B:

Investor may favor Rogers since it is having a higher price earning ratio. Investors favors higher P/E ratio, since companies having higher P/E ratio is expected to have higher growths. But this may not always be true. A price earning ratio could be due to the fact that share is overvalued. Rogers is highly levered.


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