Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.

                                                              2007 (, 000)

Current liabilities                                  $ 554,114

Convertible subordinated debt             648,020

Total liabilities                                       1,228,313

Stockholders’ equity                                176,413

Net income                                                 58,333

Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, “Financial Instruments,” convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.

(a) Compute the following ratios for Sepracor, Inc. (Assume that year-end balances approximate annual averages.)

(1) Return on assets.

(2) Return on stockholders’ equity.

(3) Debt to assets ratio.

(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007 were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company’s 5% convertible bonds? Explain.

(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity component of Sepracor’s convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer?