Part III As general background read the Financial Highlights

Part III. As general background, read the Financial Highlights, the letter addressed To Our Stockholders and Management’s Discussion – Results of Operations and Financial Condition.

The answers to the previous question 1-3 can be found in the following:

https://www.chegg.com/homework-help/questions-and-answers/3-assume-dramatic-changes-international-business-environment-prepare-estimate-toys-r-us-s--q26323277

https://www.chegg.com/homework-help/questions-and-answers/part-iii-general-background-read-financial-highlights-letter-addressed-stockholders-manage-q26323273

With all the following information, answer questions 4 and 5.

4. Starting with your estimate of net sales for fiscal 1995, estimate the range of net income which you expect the company to earn. Again, explain fully the reasoning behind your estimate.

5. At the end of 1994, the market price of the company’s capital stock was approximately $29 per share. Assume that net sales and net income both increase to amounts right in the middle of your estimated ranges. Does this mean that the market price of the company’s capital stock will increase during 1995? Explain.

No need to answer questions 1-3. Just answer questions 4-5.

ANNUAL REPORT OF TOYS \"R\" US Intended for Uise after Chapter 8. In this appendix we present the 1995 annual report of Toys \"R\" Us, a publicly held corporation. This report was selected to illustrate many of the financial reporting concepts discussed in this textbook. But not all of the terminology and accounting policies appearing in this report are consistent with our text discussions. This illustrates some of the diversity that exists in financial reporting. TOSUs ANNUAL REPORT YEAR END ED JANUARY 28. 1 99s

Solution

Most obvious profitability measure for a concern is net margin. Although the net margin may vary depending on the industry, market type, the products that are sold and/or the services that are offered by a company. Net profit margin represents net income as a percentage of sales. Net income includes all the expenses plus financial items such as interest and taxes. It is calculated as:

Net Profit Margin Percentage = Net income / Sales

By looking at the past years financials, it can be estimated that the net margin percentage is likely to be around 6% of the net sales. If the sales grows in a year, net profit is expected to grow in the equal proportion. This will only hold good as long as the company continues to produce as much as goods as it used to in the past years and there is no significant market changes likely to happen.

Not always that the market price of the company’s capital stock will grow at the same pace with the growth in net sales and net income. Although some companies fail because of ever-declining revenues, companies also fail by attempting to grow too fast. Many businesses go under because they take on contracts with deadlines that can’t be met with the current staff, equipment, capital and expertise. The sustainable growth ratio indicates the maximum earnings growth a firm can have without resorting to other means of financing. The key to sustainable growth is retaining sufficient earnings to reinvest in growth rather than paying out too much dividends from earnings. If the company pays out dividends @ 30% of earnings it means 70% it is retaining. The resulting increase in shareholder’s equity will also earn a rate of return and can continue to generate growth in earnings.

Years	1995	1994	1993	1992	1991
Net Sales	8746	7946	7169	6124	5510
Net Earnings	532	483	438	340	326
NP Margin	6.08	6.08	6.11	5.55	5.92