All your Writing needs covered

Pros and Cons of Using Perpetuity

Calculate the price
of
your order:

275 words
+
Approximate price
$ 0.00

Pros and Cons of Using Perpetuity
Table of Contents
  1. Perpetuity in real estate valuation
  2. Ratio analysis of Coca – Cola Company
  3. Liquidity
  4. Efficiency ratios
  5. Leverage and coverage ratios
  6. Profitability
  7. References

Perpetuity in real estate valuation

In real estate valuations, perpetuities do not have future values. Perpetuities are streams of cash payments that extend forever. One advantage of using perpetuities in real estate valuation is that there is no calculation of the present value of the principle amount. Thus, the present value of a perpetuity is arrived at through the division of the coupon amount and discount rate. The second advantage is that it is easy to compute and simple to understand (McLaney and Atrill 121). A disadvantage of this approach is that the present value of perpetuity high depends on the discount rate that is used. Thus, if the discount rate is low, then the present value of the perpetuity will be high. On the other hand, if the discount rate is high, then the present value of the perpetuity will be low. Thus, there is an inverse relationship between the discount rates and the value of the real estate. Another drawback is that this model of valuation does not exist in real life. It is only used in financial theory (Hansen, Mowen and Guan 252).

On-Time Delivery!
Get your customized and 100% plagiarism-free paper done in as little as 3 hours
Let’s start
322 specialists online

Ratio analysis of Coca – Cola Company

2013 2012
Current ratio = 2,568 / 2,195
= 1.17
= 2,762 / 2,579
= 1.07
Quick ratio = (2,568 – 452) / 2,195
= 0.9640
= (2,762 – 386) / 2,579
= 0.9213
Inventory turnover = 5350 / 452
= 11.84
= 5,162 / 386
= 13.37
Average Age of Inventory = (452 / 5,350) * 365
= 30.84
= (386 / 5,162) * 365
= 27.29
Average Collection Period = (1,515 / 8,212) * 365
= 67.34
= (1,432 / 8,062) * 365
= 64.83
Average Payments Period = (1,939 / 5,350) * 365
= 132.29
= (1,844 / 5,162) * 365
= 130.39
Total Asset Turnover = 8,212 / 9,525
= 0.8621
= 8,062 / 9,510
= 0.8477
Debt ratio = 7,245 / 9,525
= 0.7606
= 6,817 / 9,510
= 0.7168
Times interest earned ratio = 914 / 103
= 8.87
= 928 / 94
= 9.87
Gross Profit Margin = 2,862 / 8,212
= 0.3485
= 2,900 / 8,062
= 0.3597
Operating profit margin = (2,862 – 308) / 8,212
= 0.3110
= (2,900 – 335) / 8,062
= 0.3182
Profit Margin = 667 / 8,212
= 0.08122
= 677 / 8,062
= 0.08397
Return on Assets (ROA) = 667 / 9,525
= 0.0700
= 677 / 9,510
= 0.0711
Return on Equity (ROE) = 667 / 2,280
= 0.2925
= 677 / 2,693
= 0.2514

Liquidity

The current ratio rose from 1.07 to 1.17 while the quick ratio increased from 0.9213 to 0.964 during the period. This shows an improved ability of the company to settle the current obligations using current asset. However, the ratios are slightly lower because the ideal rate for the current ratio is 2 (Brigham and Michael 146).

Efficiency ratios

Inventory turnover ratio for the company dropped from 13.37 times to 11.84 times. This shows that the efficiency in inventory management dropped because the number of times that the company replenishes stock dropped. Also, the average age of inventory increased from 27.29 days to 30.84. It indicates that inventory takes longer in the business. The average collection period rose from 64.83 days to 67.34 days. This shows a reduction in efficiency of debt collection. Also, the average payment period increased from 130.39 days to 132.29 days. It shows that the duration the company takes to pay creditors increased (Deegan 78). This indicates that efficiency deteriorated. Finally, the amount of sales generated per unit of total asset improved slightly from 0.8477 to 0.8621. Thus, most of the asset management ratios indicate that the efficiency of the company dropped during the two year period.

Leverage and coverage ratios

The debt ratio increased from 0.7168 to 0.7606. The increase shows that the leverage position of the company increased during the period. This has a potential of increasing the amount of interest expense and a decline in net income. The times interest earned ratio declined from 9.87 times to 8.87 times. The decline is caused by a decrease in earnings before interest and tax and an increase in interest expense. Even though the values declined, the high values indicate that the company is solvent (Collier 98).

Profitability

The gross profit margin drop from 0.3597 to 0.3485. This implies that the efficiency in handling cost of sales and revenue reduced. Further, the operating profit margin also declined from 0.3182 to 0.311. Further, the return on assets declined from 0.0711 to 0.07. This shows that the efficiency in use of assets to generate revenue and sales declined. Return on equity grew from 0.2514 to 0.2925. The increase can be attributed to a reduction in the number of outstanding shares (Arnold 196).

In summary, it can be noted that the liquidity ratios improved during the two year period. However, the efficiency on asset management of the company deteriorated. Further, the leverage and coverage ratios reduced. The profitability level of the company also declined. Therefore, the financial position of the company deteriorated between 2012 and 2013.

References

Arnold, Glen. Corporate Financial Management, UK: Financial Times/Prentice Hall, 2007. Print.

Yes, we can!
Our experts can deliver a custom Pros and Cons of Using Perpetuity paper for only $13.00 $11/page
Learn More
322 specialists online

Brigham, Eugene and Ehrhardt Michael. Financial Management Theory and Practice, USA: South-Western Cengage Learning, 2009. Print.

Collier, Peter. Accounting for Managers, London: John Wiley & Sons Ltd, 2009. Print.

Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.

Hansen, Don, Maryanne Mowen and Liming Guan. Cost Management: Accounting & Control, USA: South Western Cengage Learning, 2009. Print.

McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times Prentice Hall, 2008. Print.

Basic features

  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support

On-demand options

  • Writer's samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading

Paper format

  • 275 words per page
  • 12pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, CHicago/Turabian, Havard)

Guaranteed originality

We guarantee 0% plagiarism! Our orders are custom made from scratch. Our team is dedicated to providing you academic papers with zero traces of plagiarism.

Affordable prices

We know how hard it is to pay the bills while being in college, which is why our rates are extremely affordable and within your budget. You will not find any other company that provides the same quality of work for such affordable prices.

Best experts

Our writer are the crème de la crème of the essay writing industry. They are highly qualified in their field of expertise and have extensive experience when it comes to research papers, term essays or any other academic assignment that you may be given!

Calculate the price of your order

You will get a personal manager and a discount.
We'll send you the first draft for approval by at
Total price:
$0.00

Expert paper writers are just a few clicks away

Place an order in 3 easy steps. Takes less than 5 mins.

error: Content is protected !!
Open chat
1
Reliance Papers Inc.
Get Help With All Your Homework Questions. Any Deadline, Affordable, Quality Work Guaranteed!!