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Current Liabilities

10. Current Liabilities. Suppose that at year-end Pepsi had unused lines of credit which would have allowed it to borrow a further $300 million. Suppose also that it used this line of credit to borrow $300 million and invested the proceeds in marketable securities. Would the company have appeared to be (a) more or less liquid, (b) more or less highly leveraged? Calculatethe appropriate ratios.

11. Current Ratio. How would the following actions affect a firm`s current ratio?

a. Inventory is sold at cost.

b. The firm takes out a bank loan to pay its accounts due.

c. A customer pays its accounts receivable.

d. The firm uses cash to purchase additional inventories.

12. Liquidity Ratios. A firm uses $1 million in cash to purchase inventories. What will happen to its current ratio? Its quick ratio?

13. Receivables. Chik`s Chickens has average accounts receivable of $6,333. Sales for the year were $9,800. What is its average collection period?

14. Inventory. Salad Daze maintains an inventory of produce worth $400. Its total bill for produce over the course of the year was $73,000. How old on average is the lettuce it serves its customers?

15. Inventory Turnover. If a firm`s inventory level of $10,000 represents 30 days` sales, what is the annual cost of goods sold? What is the inventory turnover ratio?

16. Leverage Ratios. Lever Age pays an 8 percent coupon on outstanding debt with face value $10 million. The firm`s EBIT was $1 million.

a. What is times interest earned?

b. If depreciation is $200,000, what is cash coverage?

c. If the firm must retire $300,000 of debt for the sinking fund each year, what is its ¬fixedpayment cash-coverage ratio ­ (the ratio of cash flow to interest plus other fixed debt payments)?

17. Du Pont Analysis. Keller Cosmetics maintains a profit margin of 5 percent and asset turnover ratio of 3.

a. What is its ROA?

b. If its debt-equity ratio is 1.0, its interest payments and taxes are each $8,000, and EBIT

is $20,000, what is its ROE?

18. Du Pont Analysis. Torrid Romance Publishers has total receivables of $3,000, which represents 20 days` sales. Average total assets are $75,000. The firm`s profit margin is 5 percent. Find the firm`s ROA and asset turnover ratio.

19. Leverage. A firm has a long-term debt-equity ratio of .4. Shareholders` equity is $1 million. Current assets are $200,000 and the current ratio is 2.0. The only current liabilities are notes payable. What is the total debt ratio?

20. Leverage Ratios. A firm has a debt-to-equity ratio of .5 and a market-to-book ratio of 2.0. What is the ratio of the book value of debt to the market value of equity?

21. Times Interest Earned. In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with face value of $1 million, market value of $.92 million, and a coupon rate of 8 percent. What is the firm`s times interest earned ratio?

22. Du Pont Analysis. CFA Corp. has a debt-equity ratio that is lower than the industry average, but its cash coverage ratio is also lower than the industry average. What might explain this seeming contradiction?

23. Leverage. Suppose that a firm has both floating rate and fixed rate debt outstanding. What effect will a decline in market interest rates have on the firm`s times interest earned ratio? On the market value debt-to-equity ratio? Based on these answers, would you say that leverage has increased or decreased?

24. Interpreting Ratios. In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio:

a. Debt-equity ratio: a shipping company or a computer software company

b. Payout ratio: United Foods Inc. or Computer Graphics Inc.

c. Ratio of sales to assets: an integrated pulp and paper manufacturer or a paper mill

d. Average collection period: Regional Electric Power Company or Z-Mart Discount Outlets

e. Price-earnings multiple: Basic Sludge Company or Fledgling Electronics

25. Using Financial Ratios. For each category of financial ratios discussed in this material, give some examples of who would be likely to examine these ratios and why.

26. Financial Statements. As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad. Can you use the following information to work out the missing entries: