Question

Exercise 8-55
Ratio Analysis

Intel Corporation provided the following information on its balance sheet and statement of cash flows:

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If required, round your answers to two decimal places.

1. Calculate the following:

a.	Current ratio
b.	Quick ratio
c.	Cash ratio
d.	Operating cash flow ratio

2. Conceptual Connection: Interpret these results.

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

3. Conceptual Connection: Assume that Intel, as a requirement of one of their loans, must maintain a current ratio of at least 2.30. Given their large amount of cash, how could they accomplish this on December 31st?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Specify your previous answer as to dollar amounts.

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Answer 1

Answer 1.

Current Assets = Cash and Equivalents + Marketable Securities + Receivables + Inventories + Other Current Assets
Current Assets = $6,598,000,000 + $3,404,000,000 + $2,709,000,000 + $4,314,000,000 + $2,146,000,000
Current Assets = $19,171,000,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $19,171,000,000 / $8,514,000,000
Current Ratio = 2.25

Quick Ratio = (Current Assets - Inventories - Other Current Assets) / Current Liabilities
Quick Ratio = ($19,171,000,000 - $4,314,000,000 - $2,146,000,000) / $8,514,000,000
Quick Ratio = 1.49

Cash Ratio = (Cash and Equivalent + Marketable Securities) / Current Liabilities
Cash Ratio = ($6,598,000,000 + $3,404,000,000) / $8,514,000,000
Cash Ratio = 1.17

Operating Cash Flow Ratio = Cash Flows from Operating Activities / Current Liabilities
Operating Cash Flow Ratio = $10,620,000,000 / $8,514,000,000
Operating Cash Flow Ratio = 1.25

Answer 2.

The current ratio appears to be strong because as a general rule of thumb, a current ratio over 2 is considered good. The operating cash flow ratio indicates that the cash that the company is generating is sufficient to meet the current liabilities.

Answer 3.

Use some of the cash to pay off some of the current liabilities.

Current Ratio = (Current Assets - Cash Paid) / (Current Liabilities - Cash Paid)
2.30 = ($19,171,000,000 - Cash Paid) / ($8,514,000,000 - Cash Paid)
$19,582,200,000 - 2.30 * Cash Paid = $19,171,000,000 - Cash Paid
$411,200,000 = 1.30 * Cash Paid
Cash Paid = $316,307,692