debt1-hw - Long-Term Borrowings Exercise 1 Compare the two...

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Unformatted text preview: Long-Term Borrowings Exercise 1 Compare the two commonly used methods of determining interest on bonds. Exercise 2 AGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troy’s The Almanac of Business and Industrial Financial Ratios. Following are the 2011 and 2010 comparative income statements and balance sheets for AGF. (The financial data we use are from actual financial statements of a well-known corporation, but the company name is fictitious and the numbers and dates have been modified slightly to disguise the company’s identity.) AGF FOODS COMPANY Years Ended December 31, 2011 and 2010 ($ in millions) Comparative Income Statements 2011 2010 Net sales $6,440 $5,800 Cost of goods sold (3,667 ) (3,389 ) Gross profit 2,773 2,411 Operating expenses (1,916 ) (1,629 ) Operating income 857 782 Interest expense (54 ) (53 ) Income from operations before tax 803 729 Income taxes (316 ) (287 ) Net income $ 487 $ 442 Comparative Balance Sheets Assets Property, plant, and equipment (net) $2,592 $2,291 Intangibles (net) 800 843 Other assets 74 60 Total current assets 1,879 1,490 Total assets $5,345 $4,684 Liabilities and Shareholders’ Equity Shareholders’ equity: Ordinary shares $ 180 $ 180 Reserves 21 63 Retained earnings 2,730 2,428 Total shareholders’ equity 2,931 2,671 © J. David Spiceland, Fall, 2010 1 Strategic Accounting 7120 Long-term debt 534 728 Deferred income taxes 407 344 Total current liabilities 1,473 941 Total liabilities 2,414 2,013 Total liabilities and shareholders’ equity $5,345 $4,684 Long-term solvency refers to a company’s ability to pay its long-term obligations. Financing ratios provide investors and creditors with an indication of this element of risk. Required: 1. Calculate the debt to equity ratio for AGF for 2011. The average ratio for the ordinary shares listed on the New York Stock Exchange in a comparable time period was 1.0. What information does your calculation provide an investor? 2. Is AGF experiencing favorable or unfavorable financial leverage? 3. Calculate AGF’s times interest earned ratio for 2011. The coverage for the ordinary shares listed on the New York Stock Exchange in a comparable time period was 5.1....
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This note was uploaded on 07/18/2011 for the course IBUS 311 taught by Professor Chen during the Spring '08 term at Binghamton.

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debt1-hw - Long-Term Borrowings Exercise 1 Compare the two...

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