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Chapter 2: Q1DQ (page 74)

If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and forwhat reasons?

Short Answer

Expert verified

Short-term lenders are most interested in the short-term liquidity ratios to evaluate the short-term solvency, and long-term lenders are interested in the financial leverage ratios. The interest coverage ratio evaluates the long-term solvency position of the company. In addition, the stockholders are interested in the profitability and market ratios to know the profitability of the company.

Step by step solution

01

Short term lenders are interested in short term liquidity ratios:

Short-term lenders are interested in the short-term liquidity ratios because they owed their dues within one year. Therefore, they want to know whether the short-term assets of an organization are adequate to meet the short-term liabilities.

02

Long term lenders are interested in Financial leverage ratios and interest coverage ratios:

Long-term lenders are concerned with the financial leverage and interest coverage ratios because they owe their dues over the long term.Therefore, they want to know whether the company is over-leveraged and the gross income of the company is sufficient to meet the finance cost.

03

Stockholders are interested in profitability ratios and the market ratios:

Stockholders are concerned with the profitability ratios and the market ratios because the stockholders want that the organization earn profits consistently over time and generate cash flow to distribute to the stockholders.

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Most popular questions from this chapter

The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:

STERLINE TIRE COMPANY

Income Statement

For the year ended December 31, 20X1

Sales (20,000 tires at \(60 each)

\)1,200,000

Less: variable costs (20,000 tires at \(30)

600,000

Less: fixed cost

400,000

Earnings before interest and taxes (EBIT)

\)200,000

Interest expenses

50,000

Earning before taxes (EBT)

\(150,000

Income tax expenses (30%)

45,000

Earning after taxe (EAT)

\)105,000

Given this income statement, compute the following:

b. Degree of financial leverage.

Galehouse Gas Stations Inc. expects sales to increase from \(1,550,000 to \)1,750,000 next year. Galehouse believes that net assets (Assets - Liabilities) will represent 50 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends.

a. What effect will this growth have on funds?

Using the financial statements for the Snider Corporation, calculate the 13 basic ratios found in the chapter.

SNIDER CORPORATION

Balance sheet

December 31, 20X1

Assets

Current assets:

Cash

\(52,200

Marketable securities

24,400

Accounts receivable (net)

222,000

Inventory

238,000

Total current assets

\)536,600

Investments

65,900

Plant and equipment

\(615,000

Less: accumulated depreciation

(271,000)

Net plant and equipment

\)344,000

Total assets

\(946,500

Liabilities and stockholder鈥檚 equity

Current liabilities:

Account payables

\)93,400

Notes payable

70,600

Accrued taxes

17,000

Total current liabilities

\(181,000

Long term liabilities:

Bonds payable

\)153,200

Total liabilities

\(334,200

Stockholder鈥檚 equity

Preferred stock, \)50 per value

\(100,000

Common stock, \)1 par value

80,000

Capital paid in excess of par

190,000

Retained earnings

242,300

Total stockholder鈥檚 equity

\(612,300

Total liabilities and stockholder鈥檚 equity

\)946,500

SNIDER CORPORATION

Income statement

For the year ending December 31, 20X1

Sales (on credit)

\(2,064,000

Less: cost of goods sold

1,313,000

Gross profit

\)751,000

Less: selling and administrative expenses

496,000*

Operating profit (EBIT)

\(255,000

Less: interest expenses

26,900

Earning before tax (EBT)

\)228,100

Less: taxes

83,300

Earning after taxes (EAT)

\(144,800

*includes \)36,100 in lease payments

Dr. Zhiva虁go Diagnostics Corp.鈥檚 income statement for 20X1 is as follows:

Sales\( 2790000
Cost of goods sold1790000
Gross Profits\)1000000
Selling and administrative expenses302000
Operating profits\(698000
Interest Expense54800
Income before taxes\)643200
Taxes30%192960
Income after-tax$ 450240

Compute the profit margin for 20X1.

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.
See all solutions

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