This loan would change barones current ratio and debt

Info icon This preview shows pages 2–3. Sign up to view the full content.

View Full Document Right Arrow Icon
this loan would change Barone’s current ratio and debt to total assets ratio, and discuss whether you would make the sale. - The current ratio for Barone would be unaffected because the proposal involves equipment, which is an item under Property, Plant & Equipment , and it also involves a note payable, which is a long-term liability—none of which would influence current assets or current liabilities. - The Debt-to-Total Assets ratio would result in an increase in the percentage of solvency, because total liabilities increased greater than total assets. - If I were the president of Allied Equipment, I would make the sale because in addition to selling the equipment, the financing of the equipment would allow Allied Equipment to receive $10,000 of interest though the 10%, 5-year note payable arrangement. Chapter 2, Problem 2-5A (a) Compute the following values and ratios for 2010. (We provide the results from 2009 for comparative purposes.) (i) Working capital = Current Assets – Current Liabilities = 428,900 – 215,500 Working capital = $213,400 (ii) Current ratio = Current Assets / Current Liabilities = 428,900 / 213,400 Current Ratio = 2.01:1 (iii)Free cash flow = Cash Provided by Operations – Capital Expenditures – Cash Dividends = 190,800 – 92,000 – 31,000 Free cash flow = $67,800 (iv)Debt-to-total assets ratio = Total Liabilities / Total Assets
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
= 415,500 / 1,054,200 Debt-to-total assets ratio = .3941 = 39.41% (v) Earnings per share = (Net Income – Stock Dividends) / Average Number of Common Shares = (133,100 – 31,000) / 50,000 Earnings per share = $2.04 (b) Using your calculations from part (a), discuss changes from 2009 in liquidity, solvency, and profitability. Liquidity: The liquidity increased from a ratio of 1.65:1 in 2009 to 2.01:1 in 2010 Solvency: The Solvency decreased, because the debt-to-total assets ratio increased from 31% in 2009 to 39.41% in 2010. Profitability: There was a decrease in profitability, because the earnings per share decreased from $3.15 in 2009 to $2.04 in 2010.
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern