Compared with its unadjusted debt-to-equity ratio, Mikko’s debt-to-equity ratio as of December 31, 2018, after the adjustments suggested by Groff , is:

A . lower.

B . higher.

C . the same.

Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a comparative fi nancial analysis between Crux and its two main competitors, Rolby Corp. and Mikko Inc. Crux and Mikko report under US GAAP, and Rolby reports under IFRS.
Groff gathers information on Crux, Rolby, and Mikko. Th e relevant fi nancial information he compiles is in Exhibit 1. Some information on the industry is in Exhibit 2.

To compare the fi nancial performance of the three companies, Groff decides to convert LIFO fi gures into FIFO fi gures, and adjust fi gures to assume no valuation allowance is recognized by any company.
After reading Groff ’s draft report, his supervisor, Rachel Borghi, asks him the following questions:
Question 1 Which company’s gross profi t margin would best refl ect current costs of the industry?
Question 2 Would Rolby’s valuation method show a higher gross profi t margin than Crux’s under an infl ationary, a defl ationary, or a stable price scenario?
Question 3 Which group of ratios usually appears more favorable with an inventory write-down?

Transcribed Image Text:

EXHIBIT 1 Selected Financial Information (US$ Millions) Inventory valuation method Crux Rolby Mikko LIFO FIFO LIFO From the Balance Sheets As of December 31, 2018 Inventory, gross 480 620 510 Valuation allowance 20 25 14 Inventory, net 460 595 496 Total debt 1,122 850 732 Total shareholders' equity 2,543 2,403 2,091 As of December 31, 2017 Inventory, gross 465 602 401 Valuation allowance 23 15 12 Inventory, net 442 587 389