PROBLEM 10–6 You are a senior portfolio manager with Reilly Investment Management reviewing the biweekly printout of equity value screens prepared by a brokerage firm. One of the screens used to identify companies is a “low long-term debt/total long-term capital ratio.” The printout indicates this ratio for Lubbock Corporation is 23.9%. Your reaction is that Lubbock might be a potential takeover target and you proceed to analyze Lubbock’s balance sheet reproduced below:

LUBBOCK CORPORATION Condensed Balance Sheet, ($ millions)

December 31, Year 7 Assets Cash and equivalents ..........................................................$ 100 Receivables.......................................................................... 350 Marketable securities........................................................... 150 Inventory .............................................................................. 800 Other current assets............................................................. 400 Total current assets.............................................................. 1,800 Plant and equipment, net..................................................... 1,800 Total assets..........................................................................$3,600 Liabilities and Equity Note payable ........................................................................$ 125 Accounts payable ................................................................. 175 Taxes payable....................................................................... 150 Other current liabilities ........................................................ 75 Total current liabilities ......................................................... 525 Long-term debt .................................................................... 675 Deferred taxes (noncurrent).................................................. 175 Other noncurrent liabilities .................................................. 75 Minority interest ................................................................... 100 Common stock...................................................................... 400 Retained earnings................................................................ 1,650 Total liabilities and equity....................................................$3,600