1. (Liquidity analysis) The Crown Carpet Company has $3,000,000 in cash and a total of $12,000,000 in current assets. The firm's current liabilities equal $6,000,000 such that the firm's current ratio equals 2. The company's managers want to reduce the firm's cash holdings down to $1,000,000 by paying $500,000 in cash to expand the firm's truck fleet and using $1,500,000 in cash to retire a short-term note. If they carry this plan through, what will happen to the firm's current ratio?

2. (Capital structure analysis) The Garner Transport Company currently has net operating income of $500,000 and pays interest expense of $200,000. The company plans to borrow $1 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $400,000 a year.

What is Garner's times interest earned ratio before the loan is taken out and the investment is made?

What effect will the loan and the investment have on the firm's times interest earned ratio?

3. (Financial statement analysis) Lopez Electronics' management has long viewed TKO Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are as follows:

Lopez Electronics, Inc. Balance Sheet ($000)TKO Electronics, Inc. Balance Sheet

Cash $2,000 $1,500

Accounts receivable 4,500$6,000

Inventories 1,500 2,500

Current assets $8,000 $10,000

Net fixed assets 16,000 25,000

Total assets $24,000 $35,000

Accounts payable $2,500 $5,000

Accrued expenses 1,000 1,500

Short-term notes payable 3,500 1,500

Current liabilities $7,000 $8,000

Long-term debt 8,000 4,000

Owners' equity 9,000 23,000

Total liabilities and owners' equity $24,000 $35,000

Lopez Electronics, Inc. Income Statement ($000) TKO Electronics, Inc. Income Statement ($000)

Net sales (all credit) $48,000 $70,000

Cost of goods sold -36,000 -42,000

Gross profit $12,000 $28,000

Operating expenses -8,000 -12,000

Net operating income $4,000 $16,000

Interest expense -1,150-550

Earnings before taxes 2,850 15,450

Income taxes (40%) -1,140-6,180

Net income $1,710 $9,270

1. Calculate the following ratios for both Lopez and TKO:

Current ratio

Times interest earned

Inventory turnover

Total asset turnover

Operating profit margin

Operating return on assets

Debt ratio

Average collection period

Fixed asset turnover

Return on equity