Reference no: EM131733051

1. (Liquidity analysis) The Crown Carpet Company has $3,000,000 in cash and a total of $12,000,000 in current assets. The firm's current liabilities equal $6,000,000 such that the firm's current ratio equals 2. The company's managers want to reduce the firm's cash holdings down to $1,000,000 by paying $500,000 in cash to expand the firm's truck fleet and using $1,500,000 in cash to retire a short-term note. If they carry this plan through, what will happen to the firm's current ratio?

 

2. (Capital structure analysis) The Garner Transport Company currently has net operating income of $500,000 and pays interest expense of $200,000. The company plans to borrow $1 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $400,000 a year.

 

• What is Garner's times interest earned ratio before the loan is taken out and the investment is made?
• What effect will the loan and the investment have on the firm's times interest earned ratio?

 

3. (Financial statement analysis) Lopez Electronics' management has long viewed TKO Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are as follows:

 

Lopez Electronics, Inc. Balance Sheet ($000)   TKO Electronics, Inc. Balance Sheet

 

Cash                         $2,000                                                            $1,500

 

Accounts receivable 4,500                                                            $6,000

 

Inventories                1,500                                                              2,500

 

Current assets            $8,000                                                          $10,000

 

Net fixed assets         16,000                                                           25,000

 

Total assets               $24,000                                                           $35,000

 

Accounts payable     $2,500                                                             $5,000

 

Accrued expenses     1,000                                                               1,500

 

Short-term notes payable    3,500                                                   1,500

 

Current liabilities                $7,000                                                 $8,000

 

Long-term debt        8,000                                                               4,000

 

Owners' equity         9,000                                                               23,000

 

Total liabilities and owners' equity $24,000                                   $35,000

 

Lopez Electronics, Inc. Income Statement ($000) TKO Electronics, Inc. Income Statement ($000)

 

Net sales (all credit) $48,000                                               $70,000

 

Cost of goods sold     -36,000                                                -42,000

 

Gross profit              $12,000                                               $28,000

 

Operating expenses  -8,000                                                 -12,000

 

Net operating income $4,000                                              $16,000

 

Interest expense       -1,150                                                -550

 

Earnings before taxes 2,850                                                15,450

 

Income taxes (40%) -1,140                                                 -6,180

 

Net income                $1,710                                                $9,270

 

1. Calculate the following ratios for both Lopez and TKO:

 

• Current ratio
• Times interest earned
• Inventory turnover
• Total asset turnover
• Operating profit margin
• Operating return on assets
• Debt ratio
• Average collection period
• Fixed asset turnover
• Return on equity