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1 . Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow.

1. Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms debt and the firms profitability.ItemPelican Paper, Inc.Timberland Forest, Inc.Total assets10,000,00010,000,000Total equity (all common)9,000,0005,000,000Total debt1,000,0005,000,000Annual interest100,000500,000Total sales25,000,00025,000,000Gross profit9,000,0009,000,000Earning before interest and tax (EBIT)6,250,0006,250,000Earning available for common stockholders3,690,0003,450,000(a) Calculate the following debt ratios for the two companies. Discuss their profitability relative to each other.(1) Debt ratio(2) Times interest earned ratio(b) Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.(1) Gross profit margin(2) Net profit margin(3) Return on total assets(4) Return on common equity(c). In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberlands investors undertake when they choose to purchase its stock instead of Pelicans? 2. The actual sales and purchases for Xenocore, Inc., for September and October 2015, along with its forecast sales and purchases for the period November 2015 through April 2016, follow. The firm makes 20% of all sales for cash and collects on 40% of its sales in each of the 2 months following the sale. Other cash inflows are expected to be $12,000 in September and April, $15,000 in January and March, and $27,000 in February. The firm pays cash for 10% of its purchases. It pays for 50% of its purchases in the following month and for 40% of its purchases 2 months later.YearMonthSales ($)Purchases ($)2015September210,000120,002015October250,000150,0002015November170,000140,0002015December160,000100,0002016January140,00080,0002016February180,000110,0002016March200,000100,0002016April250,00090,000Wages and salaries amount to 20% of the preceding months sales. Rent of $20,000 per month must be paid. Interest payments of $10,000 are due in January and April. A principal payment of $30,000 is also due in April. The firm expects to pay cash dividends of $20,000 in January and April. Taxes of $80,000 are due in April. The firm also intends to make a $25,000 cash purchase of fixed assets in December.(a) Assuming that the firm has a cash balance of $22,000 at the beginning of November, determine the end-of-month cash balances for each month, November through April.(b) Assuming that the firm wishes to maintain a $15,000 minimum cash balance, determine the required total financing or excess cash balance for each month, November through April.(c) If the firm was requesting a line of credit to cover needed financing for the period November to April, how large would this line have to be? Explain your answer.
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