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Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below.
Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out.
a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios?
b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies?
c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company?
d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk andreturn.)
Stern Manufacturing issued a 10-year, 12% semiannual bond 5 years back. The debt issue is currently priced at $925. The firm's marginal tax rate is 39%. What is Stern's after-tax component cost of debt?
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