Homework Assignment - Week 1

# This loan would change barones current ratio and debt

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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

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= 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.
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