Assign_10_-_Solutions_to_Practice_Problem

The denominator of the quick ratio should be total

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is also incorrect, as it does not include accrued liabilities. The denominator of the quick ratio should be total current liabilities. The correct calculations are as follows: Working Capital = Current Assets – Current Liabilities $160,000 = $960,000 – $800,000 Current Ratio = = 1.2 Quick Ratio = = 1.0 b. Unfortunately, the current ratio and quick ratio are both below the minimum threshold required by the bond indenture. This may require the company to renegotiate the bond contract, including a possible unfavorable change in the interest rate.
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Ex. 15–20 a. = = 7.4 times *$3,750,000 bonds payable × 10% b. Number of Times Preferred Dividends Are Earned = = 10.0 times **$2,400,000 income before tax – $400,000 income tax c. Earnings per Share on Common Stock = = $5.00 d. Price-Earnings Ratio = = 14.4 e. Dividends per Share of Common Stock = = $2.00 f. Dividend Yield = = 2.8%
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Ex. 15–21 a. Earnings per Share = = $2.50 *($1,250,000/$25) × $5 **$4,000,000/$10 b. Price-Earnings Ratio = = 16.0 c. Dividends per Share = = $2.00 d. Dividend Yield = = 5.0%
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Ex. 15–22 a. Price-Earnings Ratio = The Home Depot: = 21.3 Google: = 22.4 Coca-Cola: = 17.3 Dividend Yield = The Home Depot: = 2.8% Google: = 0.0% Coca-Cola: = 3.3% b. Coca-Cola has the largest dividend yield, but the smallest price-earnings ratio. Stock market participants value Coca-Cola common stock on the basis of its dividend. The dividend is an attractive yield at this date. Because of this attractive yield, stock market participants do not expect the share price to grow significantly, hence the low price-earnings valuation. This is a typical pattern for companies that pay high dividends. Google shows the opposite extreme. Google pays no dividend, and thus has no dividend yield. However, Google has the largest price-earnings ratio of the three companies. Stock market participants are expecting a return on their investment from appreciation in the stock price. The Home Depot is priced in between the other two companies. The Home Depot has a moderate dividend producing a yield of 2.8%. The price-earnings ratio is slightly over 21. Thus, The Home Depot is expected to produce shareholder returns through a combination of some share price appreciation and a small dividend.
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