1 What conclusion s are indicated by the ratio analysis 2

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1. What conclusion(s) are indicated by the ratio analysis?2. What is the firm's current payout
ratio compared to its historical payout ratio?3. What are the annual growth rates in the earnings
per share and the dividend?4. Is there any reason to believe that the firm has changed its
dividend policy?5. Risk is affected by many factors. How may each of the following affect the
firm-specific (unsystematic) risk associated with Dentex?a) Its product lineb) Its use of debt
financingc) Foreign competition6. Does Dentex's P/E ratio suggest the firm is undervalued?7.
Why is the growth rate in the dividend not sustainable?8. If a dividend growth rate of 4 percent
can be sustained, is the stock a good purchase if the required return is 9.5 percent?9. If the
beta coefficient were 0.8 and the sustainable growth is assumed to be 4 percent, should the
stock be purchased if the risk-free rate is3.5 percent and the anticipated return on the market is
9.5 percent?H.B. Babalola often observed that the clothes worn by his daughters and their
friends were made of denim. No matter what the style, blue jeans and other clothes made of
denim were popular. While certain styles would remain popular for only brief periods, the use of
denim continued year after year. Babalola reasoned that the manufacturers of denim may be
potentially attractive investments, as there appeared to him to be little fluctuation in the demand
for denim.Babalola discovered that the primary manufacturer and importer of denim was
Dentex. Dentex specializes in denim and produces only a modest amount of other types of
cloth. Its sales of denim account for one-third of the total denim market, both domestic and
abroad. Dentex's balance sheets and income statements for the last two years are presented in
Exhibit 1. Dentex's per-share earnings and dividends are given in Exhibit 2. With the exception
of the most recent year, 2015, and 2012, per-share earnings have steadily increased, and
dividends have risen every year for the last ten years. This pattern of earnings and dividend
growth impressed Babalola, who tended to think of textiles as a dull industry with little growth
potential.Babalola realized that for the firm to be a good investment, it should have strong
fundamentals and be financially sound. So he decided to use ratios to analyze the firm's
financial statements. From other sources, he found the industry averages given in Exhibit
3.Currently Dentex's stock sells for $50. Babalola could invest in U.S. Treasury bills that yield
3.5 percent, but he believes that the stock market may offer a return over a period of years of
9.5 percent. Should he buy the stock of Dentex? To help Babalola with his decision, answer the
following questions:View Solution:
1 What conclusion s are indicated by the ratio analysis 2 What

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