SHOW ALL OF YOUR WORK 6. A firm has cash of 100,000, accounts receivable of 75,000,...
SHOW ALL OF YOUR WORK
6. A firm has cash of 100,000, accounts receivable of 75,000,
prepaid expenses of 12,500, accounts payable of 50,000, other
current liabilities of 35,000, common stock of 375,000 and long
term liabilities of 65,000. The firm also produced a profit of
20,000 during the last calendar year. What is the firms working
capital?
7. Which company has the most risk from an investor's standpoint?
Firm A has a PE of 84 times and Firm B has a PE of 16 times. Assume
both firms operate in the same industry. Firm A has fewer shares
outstanding than Firm B.
|
A. |
Firm A because it has the higher PE ratio. |
|
B. |
Firm B because it has a lower PE ratio. |
|
C. |
Firm A because it has fewer shares outstanding. |
|
D. |
Firm B because it has more shares outstanding. |
8. A firm has an ACP of 45 days and its annual sales are $5.3
million. What is its account receivable balance?
9. An investor wanting large returns will be interested in
companies that have:
|
A. |
high ROAs. |
|
B. |
high ROEs. |
|
C. |
high current ratios. |
|
D. |
high times interest earned. |
10. Which type of ratio measures a firm's ability to pay off
short-term obligations without relying on inventory
sales?
Homework Answers
Question 6.
Working capital = Current assets – Current liabilities
Current assets = cash + accounts receivables + prepaid expenses
Current assets = 100000+75000+12500 = $ 187,500
Current liabilities = Accounts payable + other current liabilities
Current liabilities = 50000+35000 = 85000
Therefore, Working capital = 187500- 85000 = $ 102,500
Question 7
Firm A P/E ratio = 84 times whereas Firm B P/E ratio = 16 times
The firm with lower PE ratio is more stable than a firm with higher PE ratio
So as per above discussion Firm A is risky then Firm B due to higher PE ratio.
Question 8
ACP = 45 days
Annual sales = $ 5.3 million
ACP = 365 / receivable turnover ratio
So, Receivable turnover ratio = 365/ 45 = 8.11
Receivable turnover ratio = Sales revenue / Avg Accounts receivable
So, Accounts receivable = 5.3 million / 8.11 = $ 653,424.66
Question 9
Investor who requires higher returns from the stocks would invest in a company which has more ROEs. As if the stock is having more ROEs it would have the capacity to pay more returns.
Question 10
Quick ratio or Acid test ratio is the ratio that measures the firm’s ability to pay short obligations without relying on the inventory turnover.
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