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Dynamic Electronics, Inc., a successful and high-growth company, consistently experiences a favorable difference between the rate of return on its...

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1. Dynamic Electronics, Inc., a successful and high-growth company, consistently experiences a favorable difference between the rate of return on its assets and the interest rate paid on borrowed funds. Explain why this company should not increase its debt to the 90% level of total capitalization and thereby minimize any need for equity financing. 2. Company B is a wholly owned subsidiary of Company A. Company A is also Company B’s principal customer. As a potential lender to Company B, what particular facets of this relationship concern you most? What safeguards, if any, do you require in any loan contract? 3. Analysts cannot unequivocally accept the depreciation amount. One must try to estimate the age and efficiency of plant assets. It is also useful to compare depreciation, current and accumulated, with gross plant assets, and to make comparisons with similar companies. While an analyst cannot adjust earnings for depreciation with precision, an analyst doesn’t require precision. Comment on these statements. 4 a. Explain the concept of a company’s operating cycle and its meaning. b. Discuss the significance of the operating cycle to classification of current versus noncurrent items in a balance sheet. Cite examples. c. Is the operating cycle concept useful in measuring the current debt-paying ability of a company and the liquidity of its working capital components? d. Describe the impact of the operating cycle concept for classification of current assets in the following industries: (1) tobacco, (2) liquor, and (3) retailing
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