Comparison of balance sheet data France Telecom, the dominant fixed line and wireless telecommunications company in France, expanded its international operations in 2000. In August it acquired UK-based Orange plc and combined its wireless business with that of Orange to form a pan-European group with 30 million subscribers. It also made investments in Internet-related businesses and data communications companies outside France in the same year. The condensed balance sheets in Exhibit 2.7 are taken from its 2001 Englishlanguage annual report.

Required

(a) Calculate France Telecom’s current ratio and debt–equity ratio at 31 December 1999 and 2001.
Is France Telecom better able to pay its current liabilities at the end of 2001 than at the end of 1999? Has its financial leverage increased between these two dates?

(b) Examine the three balance sheets in Exhibit 2.7 more closely. Why have the current and debt–
equity ratios changed between end-1999 and end-2001?AppenedixLO1

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Exhibit 2.7 ASSETS Current assets France Telecom CONSOLIDATED BALANCE SHEETS (CONDENSED) at 31 December 1999, 2000 and 2001 (amounts in million) 31 December 2001 2000 1999 Cash and marketable securities 4,081 2,256 2,635 Trade and other receivables 10,285 8,783 6,884 Inventories 900 1,216 621 Prepayments and other current assets 7,755 6,391 3,353 23,021 18,646 13,493 Fixed assets Intangible assets 53,152 52,338 2,131 Property, plant and equipment 31,728 34,623 28,964 Long-term financial investments 12,152 20,724 6,739 Other long-term assets 7,305 3,254 2,728 104,337 110,939 40,562 Total assets 127,358 129,585 54,055 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt 12,961 32,707 5,030 Trade and other payables 15,890 15,347 9,538 Other current liabilities 6,113 10,571 2,800 34,964 58,625 17,368 Long-term liabilities Long-term debt 54,543 30,547 12,233 Pension plan and other long-term liabilities 8,663 5,220 4,182 63,206 35,767 16,415 Minority interest 8,101 2,036 1,369 Shareholders' equity Share capital 4,615 4,615 4,098 Additional paid-in capital 24,228 24,228 6,629 Retained earnings 5,526 2,807 5,408 Net income (loss) for the year (8,280) 3,660 2,768 Own shares (5,002) (2,153) 21,087 33,157 18,903 Total liabilities and shareholders' equity 127,358 129,585 54,055