2. Part of Owen’s evaluation will consist of comparing the firm’s ratios to the industry as shown in Exhibit C3.3 of the text. Discuss the limitations of such a comparative financial analysis. In view of these limitations, why are such industry comparisons so frequently made? (Note: Sales are forecast to be $8.25 million in 2014). Type a three- to four-sentence response below.

3. Owen thinks that the profitability of the firm has been hurt by Tessa’s reluctance to use much interest-bearing debt. Is this a reasonable position? Explain. Type a three- to four-sentence response below.

4. The case mentions that Tessa rarely takes trade discounts, which are typically 1½/10, net 30. Does this seem like a wise financial move? Explain. Type a three- to four-sentence response below.

5. Is the estimate of $35 to $40 for Owen’s shares a fair evaluation? Explain. Type a three- to four-sentence response below.

      

1. Using the data in exhibits C2.1 and C3.3, calculate and analyze the firm's 2012 and 2013 ratios. Enter the ratios in the table below in the 2012 and 2013 columns, respectively: Ratio Type 2012 2013 Current (times) Quick (times) Debt (%) Times interest earned (times) Inventory turnover (times) Total asset turnover (times) Average collections period (days) Return on equity (%) 3.73 3.43 2.40 1.83 37.66% 35.32% 8.50 11.62 6.40 4.80 2.79 2.71 55 51 11.60% 10.81%