Financial decisions on southwick current

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Reference no: EM131118000

The Southwick Company has the following balance sheet ($000):

Assets		Liabilities and Stockholders' Equity
Cash	$ 500	Accounts payable	$ 1,750
Marketable securities	750	Notes payable	1,250
Accounts receivable	2,000	Total current liabilities	$ 3,000
Inventory	2,500	Long-term debt	1,750
Total current assets	$ 5,750	Total liabilities	$ 4,750
Plant and equipment (net)	5,000	Common stock ($1 par)	1,000
Total assets	$10,750	Contributed capital in excess of par	2,000
		Retained earnings	3,000
		Total stockholders' equity	$ 6,000
		Total liabilities and stockholders' equity	$10,750

Financial Ratios

Evaluate the impact of each of the following (independent) financial decisions on Southwick's current, quick, and debt-to-equity ratios:

a. The firm reduces its inventories by $500,000 through more efficient inventory management procedures and invests the proceeds in marketable securities.

b. The firm decides to purchase 20 new delivery trucks for a total of $500,000 and pays for them by selling marketable securities.

c. The firm borrows $500,000 from its bank through a short-term loan (seasonal financing) and invests the proceeds in inventory.

d. Southwick borrows $2 million from its bank through a 5-year loan (interest due annually, principal due at maturity) and uses the proceeds to expand its plant.

e. The firm sells $2 million (net) in common stock and uses the proceeds to expand its plant.

Reference no: EM131118000

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