MGT201 - Exam - Winter 2009 (Solutions)_1

MGT201 - Exam - Winter 2009 (Solutions)_1 - Both long-term...

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MGT201 Final Exam - Solutions Winter 2009 PART A (30 marks) 1. C 2. b 3. D 4. D 5. C 6. D 7. A 8. C 9. C 10. a 11. A 12. B 13. C 14. A 15. B 16. C 17. C 18. C 19. D 20. A 21. D 22. C 23. B 24. D 25. B 26. C 27. C 28. A 29. D 30. B PART B (5 marks) a. Revenues Sales of computers 800 x 1,500 $1,200,000
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Rental revenue 150 x 50 x 10months 75,000 Total revenues $1,275,000 b. Cost of Goods Sold 800 x 1,200 960,000 Warranty expense 800 x 20 16,000 Operating Income $ 976,000 c. The damage deposits would be reported as an liability on the balance sheet. If the computers are returned unsold the money is returned to the customer and no revenue is recognized. If the computers were damaged on return then SCC would take the amount into income at that time. PART C (10 marks) a. 2006 2007 2008 Debt/equity (I) 37.3% 44.7% 59.3% Debt/equity (II) 59.5% 80.9% 145.8% Debt/equity (III) 16.7% 30.0% 37.9% Times interest earned 23.4 7.84 7.32 Operating cash flow / total debt .58 .19 .16 b. All of the debt/equity ratios have increased significantly over the three-year period.
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Unformatted text preview: Both long-term and short-term debt have experienced substantial growth. Specifically, debt/equity (II) shows that creditors have lent $1.46 for every $1.00 of shareholders' equity. The higher this ratio, the greater the risk to the lender because shareholders' equity acts as a cushion when operating losses occur. In addition, the times-interest-earned ratio has dropped dramatically, indicating the decreasing likelihood that long-term lenders will receive their interest payments when due. The operating cash flow to total debt ratio has also deteriorated over the period and by 2008 it would take 6.2 years for the operating cash flow to pay off the total debt as opposed to 1.7 years in 2006. The bank should not advance any monies at this time due to the substantial risks involved....
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This note was uploaded on 12/21/2010 for the course MGT mgt201 taught by Professor Uppal during the Spring '09 term at University of Toronto- Toronto.

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MGT201 - Exam - Winter 2009 (Solutions)_1 - Both long-term...

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