Exam 5: Risk Analysis

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations? a. Profitability of goods and services sold Working capital requirements b. Sales of existing plant assets Plant capacity requirements c. Borrowing capacity Debt service requirements d. Profitability of goods and services sold Debt service requirements

Below is selected information from Marker's 2012 financial statements: As of Dec.31, 2012 Dec. 31, 2011 Cash and short-term investments \ 958,245 \ 745,800 Accounts Receivable (net) 125,850 135,400 nventories 195,650 175,840 Prepaid Expenses and other current assets 45,300 30,860 Total CurrentAssets \ 1,325,045 \ 1,087,900 Plant, Property and Equipment, net 1,478,320 1,358,700 Intangible Assets 125,600 120,400 Total Assets \ 2,928,965 \ 2,567,000 Short-term borrowings \ 25,190 \ 3,108 Current portion of long-term debt 45,000 40,000 Accounts payable 285,400 325,900 Accrued liabilities 916,722 705,89 ncome taxes payable 125,400 115,600 Total Current Liabilities \ 1,397,712 \ 1,225,499 Long-term Debt 450,000 430,000 Total Liabilities \ 1,847,712 \ 1,655,499 Shareholders' Equity \ 1,081,253 \ 911,501 Total Liabilities and Shareholders' Equity \ 2,928,965 \ 2,567,000 $\text { Selected Income Statement Data - for the year ending December 31, 2012: }$ Net Sales Cost of Goods Sold Operating Income Net Income \ 3,210,645 (2,310,210) \ 900,435 \ 324,850 $\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2012 \text { : }$ Cash Flows from Operations interest Expense Income Tax Expense \ 584,750 42,400 114,200 -Marker's Liabilities to Assets Ratio for 2012 is:

An analyst can view the revenues to cash ratio as a(n)______________________________________.

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

Mobile Company Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions: As of Dec. 31,2010 Dec. 31,2009 Cash and short-term investments \ 1,267,038 \ 616,604 Accounts Receivable (net) 490,816 665,828 Inventories 338,599 487,505 Prepaid Expenses and other current assets \underlind 291,915 Total Current Assets \ 2,388,964 \ 2,061,852 Current Liabilities Short-term borrowings \ 25,190 \ 38,108 Current portion of long-term debt 182,295 210,090 Accounts payable 296,307 334,247 Accrued liabilities 941,912 743,999 Income taxes payable Total Current Liabilities 1.648753 566237 $\text { Selected Income Statement Data - for the year ending December 31, 2010: }$ Net Sales \ 4,885,340 Cost of Goods Sold 2,542,35 Operating Income 733,54 Net Income 230,10 $\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$ Cash Flows from Operations \ 1.156,08 -Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be:

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

Financially healthy firms frequently close any cash flow gaps in their operating cycles with ________________________________________.

Below is selected information from Marker's 2012 financial statements: As of Dec.31, 2012 Dec. 31, 2011 Cash and short-term investments \ 958,245 \ 745,800 Accounts Receivable (net) 125,850 135,400 nventories 195,650 175,840 Prepaid Expenses and other current assets 45,300 30,860 Total CurrentAssets \ 1,325,045 \ 1,087,900 Plant, Property and Equipment, net 1,478,320 1,358,700 Intangible Assets 125,600 120,400 Total Assets \ 2,928,965 \ 2,567,000 Short-term borrowings \ 25,190 \ 3,108 Current portion of long-term debt 45,000 40,000 Accounts payable 285,400 325,900 Accrued liabilities 916,722 705,89 ncome taxes payable 125,400 115,600 Total Current Liabilities \ 1,397,712 \ 1,225,499 Long-term Debt 450,000 430,000 Total Liabilities \ 1,847,712 \ 1,655,499 Shareholders' Equity \ 1,081,253 \ 911,501 Total Liabilities and Shareholders' Equity \ 2,928,965 \ 2,567,000 $\text { Selected Income Statement Data - for the year ending December 31, 2012: }$ Net Sales Cost of Goods Sold Operating Income Net Income \ 3,210,645 (2,310,210) \ 900,435 \ 324,850 $\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2012 \text { : }$ Cash Flows from Operations interest Expense Income Tax Expense \ 584,750 42,400 114,200 -Marker's 2012 Long-term Debt to Shareholders' Equity ratio is:

When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called ______________________________.

A.Hammer Corporation wrote off $185,000 of obsolete inventory at December 31,2011. Required: What effect did this write-off have on the company's 2011 current and quick ratios? B.Assume that Hammer Company did not write off their inventory.How will this affect the company's financial position?

Changes in foreign exchange rates can affect a firm in all of the following ways except:

Doran Corp.has a current ratio of 6.Under which of the following scenarios might this indicate a problem?

Below is information from Darren Company's 2012 financial statements. Cash and short-term investments \ 958,245 \ 745,800 Accounts Receivable (net) 125,850 135,400 Inventories 195,650 175,840 Prepaid Expenses and other current assets 45,300 30,860 Total CurrentAssets \ 1,325,045 \ 1,087,900 Plant, Property and Equipment, net 1,478,320 1,358,700 Intangible Assets 125,600 120,400 Total Assets \ 2,928,965 \ 2,567,000 Short-term borrowings \ 25,190 \ 38,108 Current portion of long-term debt 45,000 40,000 Accounts payable 285,400 325,900 Accrued liabilities 916,722 705,891 Income taxes payable 125400 115600 Total Current Liabilities \ 1,397,712 \ 1,225,499 Long-term Debt 450,000 430,000 Total Liabilities \ 1,847,712 \ 1,655,499 Shareholders'Equity \ 1,081,253 \ 911,501 Total Liabilities and Shareholders' Equity \ 2,928,965 \ 2,567,000 Selected Incame Statement Data - for the year ending December 31,2012 Net Sales \ 3,210,545 Cast of Goods Sold Operating Incame Net Incame Selected Statement of Cash Flaw Data - for the year ending December 31,2012 Cash Flows fram Operations \ 584,750 Interest Expense 42,400 Incame Tax Expense 114,200 Using this information,calculate the following ratios:

Below is selected data of Pronto Company: $\text { Balance Sheet Data }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { As of December } 31 \text { : }$ 2012 2011 Accounts receivable \ 671,000 \ 642,000 Allowance for doubtful accounts 31,000 22,000 Net accounts receivable \ 640,000 \ 620,000 Inventories - LCM \ 542,500 \ 642,500 Income StatementData Net credit sales \ 3,150,000 \ 3,000,000 Net cash sales 800,000 600,000 Net sales \ 3,950,000 \ 3,600,000 Cost of goods sold \ 2,370,000 \ 2,160,000 Selling, general and adm. expenses 475,000 350,000 Other 150,000 125,000 Total operating expenses \ 2,995,000 \ 2,635,000 Net income \ 955,000 \ 965,000 Required: a.What is the accounts receivable turnover for 2012? b.What is the inventory turnover for 2012? 

Selected risk ratios are presented for 2011 and 2010 for Techtron Company.Also,refer to the financial statement data for the company. 2011 2010 Revenues to Cash Ratio 6.8 7.7 Days Revenues Held in Cash 54 47 Current Ratio 1.5 1.5 Quick Ratio 1.1 1.1 Operating Cash Flow to Average Current Liabilities Ratio 47.3\% 55.7\% Days Accounts Receivable 68 73 Days Inventory 51 68 Days Accounts Payable 47 49 Net Days Working Capital 72 91 Liabilities to Assets Ratio 0.559 0.621 Liabilities to Shareholders' Equity Ratio 1.266 1.639 Long-Term Debt to Long-Term Capital Ratio 0.330 0.418 Long-Term Debt to Shareholders' Equity Ratio 0.492 0.720 Operating Cash Flow to Total Liabilities Ratio 0.243 0.242 Interest Coverage Ratio 5.6 2.3 Financial Statements $\text { INCOME STATEMENT (in millions) }$ Fiscal year end Sales Cost of Goods Sold Selling General \& Admin. Exp. Advertising Research and Development Royalty Expense Other Selling and Administrative Interest expense Income tax expense Net income 2012 2011 2010 \ 2,500 \ 3,139 \ 2,816 (387) (364) (297) (157) (143) (154) (223) (248) (296) (385) (799) (788) (32) (53) (78) \(\begin{array}{lrrrr} \text { Balance Sheet }\\ \text { Fiscal year end }&2012&2011&2010&2009\\ \text { ASSETS (in millions) }\\ \text { Cash } & \$ 625 & \$ 421 & \$ 496 & \$ 233 \\ \text { Accounts Receivable } & 579 & 607 & 555 & 572 \\ \text { Inventories } & 195 & 169 & 190 & 217 \\ \text { Prepayments } & 219 & 212 & 191 & 346 \\ \text { Total current assets } & \$ 1,618 & \$ 1,409 & \$ 1,432 & \$ 1,368 \\ \text { Property, plant \& equipment } & 207 & 200 & 213 & 236 \\ \text { Other Assets } &\underline{ 1,416 }& \underline{1,554 }&\underline{ 1,498 }&\underline{ 1,765}\\ \text { Total assets }&\underline{\underline{\$ 3,241}} &\underline{\underline{\$ 3.163}} &\underline{\underline{\$ 3.143}}&\underline{\underline{\$3.369}}\\ \text { LIABILITIES }\\ \text { Accounts payable } & \$ 168 & \$ 159 & \$ 166 & \$ 123 \\ \text { Short-term borrowing } & 342 & 24 & 223 & 36 \\ \text { Other current liabilities } &\underline{ 584 }& \underline{749} & \underline{578} &\underline{ 599} \\ \text { Total current liablities }&\underline{\$ 1,094}&\underline{\$ 939}&\underline{\$ 967}&\underline{\$ 758}\\ \text { Long-term debt }&303 & 687 &857 & 1,166 \\ \text {Other noncurrent liabilities}&\underline{149} & \underline{141 }&\underline{128} &\underline{ 92}\\ \text { Total liabilities}&\$ \underline{1,546} &\$ \underline{1,767} &\$ \underline{1,952} &\$ \underline{2,016}\\ \\ \text {Common stock}&\$ 105 & \$ 105 & \$ 105 & \$ 105 \\ \text {Additional Paid-in Capital}&381 & 398 & 458 & 455 \\ \text {Retained earnings}&1,776 & 1,558 & 1,430 & 1,622 \\ \text {Accumulated Other Comprehensive Income }&82 & 30 & (47) & (68) \\ \text {Treasury Stock}&\underline{(649) }& \underline{(695)} &\underline{ (755) }& \underline{(761)}\\ \text {Total Shareholders' equity}&\underline{\$ 1,695}&\underline{\$ 1,396}&\underline{\$ 1,191}&\underline{\$ 1,353}\\ \text { Total Liabilities \& Shareholders' Equity }&\underline{\underline{\$ 3,241}}&\underline{\underline{\$ 3,163}}&\underline{\underline{\$ 3,143}}&\underline{\underline{\$ 3,369\}}\ \end{array}\) \(\text { STATEMENT OF CASH FLOWS (in millions) }\) \(\begin{array}{lccc} \text { Operations } & \mathbf{2 0 1 2} & \mathbf{2 0 1 1} & \mathbf{2 0 1 0} \\ \text { Net Income } & \$ 196 & \$ 175 & \$ 75 \\ \text { Depreciation \& Amortization } & \underline{146} & \underline{164} &\underline{ 184}\\ \text { (Increase) Decrease Accounts Receivables } & 28 &(52)&17\\ \text { (Increase) Decrease Inventories } & (26) &21&27\\ \text { (Increase) Decrease Prepayments } & 7&(21)&155\\ \text { (Decrease) Increase Accounts Payable \& Other }\\ \text {Current Liabilities}&\underline{(90)}&\underline{17}&\underline{23}\\ \text {Net Addbacks and Subtractions from }&\underline{(147)}&\underline{112}&\underline{221}\\ \text {operations Cash flows from operations }&\underline{\$ 195}&\underline{\$451}&\underline{\$480}\\ \text {Investing}\\ \text {Property Plant and Equipment acquired}& (\$ 79) & (\$ 63) &(\$ 59) \\ \text {Other Investing Transactions}&\underline{(6)}&\underline{(2)}&\underline{(3)}\\ \text { Cash Flows from Investing}& \underline{(\$ 85)} &\underline{(\$ 65)} &\underline{(\$ 62)}\\ \text { Financing }\\ \text { Increase in Common Stock } &0 & 0 & 0 \\ \text { Increase (Decrease) in Short-term Borrowing } & (318) & 199 & (187) \\ \text { Increase (Decrease) in Long-term Borrowing } &(384) & (170) & 309 \\ \text { Acquisition of Common Stock } &(46) & 60 & (6) \\ \text { Dividends } &(37) & (21) & (21) \\ \text { Other Financing Transactions } &\underline{879} & \underline{243} & \underline{(250)}\\ \text { Cash flow from Financing }&\underline{\$ 94}&\underline{ (\$ 311)}& \underline{(\$ 155)}\\ \text { Change in Cash } & \$ 204 & \$ 75 & \$ 263 \\ \text { Cash - Beginning of Year } &\underline{ 421} &\underline{ 496} &\underline{ 233}\\ \text { Cash - End of Year }&\underline{\underline{\$ 625}}&\underline{\underline{\$ 421}}&\underline{\underline{\$496}} \end{array}\) Required: a.Calculate the amounts of these ratios for 2012. b.Assess the changes in the short-term liquidity risk of Techtron between 2010 and 2012 and the level of that risk at the end of 2012. c.Assess the changes in the long-term solvency risk of Techtron between 2010 and 2012 and the level of that risk at the end of 2012.

Which of the following can companies use as collateral for a loan?

Below is selected information from Marker's 2012 financial statements: As of Dec.31, 2012 Dec. 31, 2011 Cash and short-term investments \ 958,245 \ 745,800 Accounts Receivable (net) 125,850 135,400 nventories 195,650 175,840 Prepaid Expenses and other current assets 45,300 30,860 Total CurrentAssets \ 1,325,045 \ 1,087,900 Plant, Property and Equipment, net 1,478,320 1,358,700 Intangible Assets 125,600 120,400 Total Assets \ 2,928,965 \ 2,567,000 Short-term borrowings \ 25,190 \ 3,108 Current portion of long-term debt 45,000 40,000 Accounts payable 285,400 325,900 Accrued liabilities 916,722 705,89 ncome taxes payable 125,400 115,600 Total Current Liabilities \ 1,397,712 \ 1,225,499 Long-term Debt 450,000 430,000 Total Liabilities \ 1,847,712 \ 1,655,499 Shareholders' Equity \ 1,081,253 \ 911,501 Total Liabilities and Shareholders' Equity \ 2,928,965 \ 2,567,000 $\text { Selected Income Statement Data - for the year ending December 31, 2012: }$ Net Sales Cost of Goods Sold Operating Income Net Income \ 3,210,645 (2,310,210) \ 900,435 \ 324,850 $\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2012 \text { : }$ Cash Flows from Operations interest Expense Income Tax Expense \ 584,750 42,400 114,200 -Marker's 2012 Liabilities to Shareholders' Equity ratio is:

Economic theory teaches that differences in market returns must relate to differences in:

Refer to the financial statement data for Patriot Corp.for 2011 and 2010.Complete the table by computing the ratios. Patiot Corp. Balance Sheet As of December 31 2011 2010 Assets: Cash and Cash Equivalents \ 69,000 \ 55,250 Accounts Receivable 126,500 80,750 Inventory Current Assets 287,500 199,750 Equipment 194,063 148,750 Less: Accumulated depreciation Equipment-Net 155,250 119,000 Land 132,250 106,250 Total assets: Liabilities: Accounts Payable \ 69,000 \ 42,500 Accrued Salaries Payable 51,750 42,500 Rent Expense Payable 35,750 28,500 Income Tax Payable Current Liabilities 161,288 114,750 Long-term note payable Total Liabilities 333,788 216,750 Stockholders' Equity: Common stock 115,000 89,250 Retained earnings Total liabilities and stockholders' equity: Patriot Corp. Income statement For the year ended December 31, 2011 Revenues \ 373,750 Cast of gouds suld Grass Prafit \ 149500 Operating Expenses Depreciation expense (9,062) Salary expense (56,063) Insurance Expense (44,850) Rent Expense (18,688) Interest Expense Total Operating Expenses Income from Operations 14,717 Income Tax Expense Net income Dividends paid to Common Shareholders \ 3.090 Financial Ratio to be calculated: 2011 2010 Current Ratio Quick Ratio Days Accounts Receivable / Days Inventory / Days Accounts Payable / Net Days Working Capital / Long-term Debt to Long-term Capital Ratio Long-term Debt to Shareholders' Equity ratio Liabilities to Total Assets Interest Coverage ratio / N/A - Not Applicable for the given year

When the excess of ROA over the after-tax cost of borrowing declines,additional ________________________________________ begins to reduce the return to common shareholders.