# Pros and Cons of Using Perpetuity

## 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).

## 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.

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.

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