1. Using the data in exhibits C2.1 and C2.3, calculate and analyze the firm's 2012 and 2013 ratios. Enter the ratios in the table below in the 2012 and 2013 columns, respectively: Ratio Type Current (times) Quick (times) Debt (%) 2012 2013 Times interest earned (times) Inventory turnover (times) Total asset turnover (times) Average collections period (days) Return on equity (%) 2. Part of Owen's evaluation will consist of comparing the firm's ratios to the industry as shown in Exhibit C2.3 of the text. Discuss the limitations of such a comparative financial analysis. In view of these limitations, why are such industry comparisons so frequently made? (Note: Sales are forecast to be $8.25 million in 2014). Type a three- to four-sentence response below. 3. Owen thinks that the profitability of the firm has been hurt by Tessa's reluctance to use much interest-bearing debt. Is this a reasonable position? Explain. Type a three- to four-sentence response below. 4. The case mentions that Tessa rarely takes trade discounts, which are typically 1/2/10, net 30. Does this seem like a wise financial move? Explain. Type a three-to four-sentence response below. 5. Is the estimate of $35 to $40 for Owen's shares a fair evaluation? Explain. Type a three- to four- sentence response below. Assets Cash $ 300,000 Accounts receivable $ 915,000 $ 244,000 $1,106,600 Inventory Other current Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets Liabilities and Net Worth Accounts payable Notes payable $ 700,000 $1,222,300 $ 36,200 $ $ 1,951,200 46,800 $2,619,700 $ 340,000 ($ 135,000) $ 205,000 $2,361,200 $ 493,600 ($ 233,800) $ 259,800 $2,879,500 $ 345,700 $ 544,800 $ 63,200 $ 63,200 Accruals $ 164,300 $ 156,100 Current liabilities $ 573,200 $ 764,100 Long-term debt $ 316,000 $ 252,800 Common stock (62,000 shares outstanding) $ 948,000 $ 1,137,600 Retained earnings $ 524,000 Total liabilities and net worth $2,361,200 $ 725,000 $2,879,500 EXHIBIT C2.1 KF Income Statements: 2012-2013 2012 Sales Cost of goods sold $6,572,800 2013 $7,811,500 4,896,700 Gross margin $1,676,100 5,866,200 $1,945,300 Administrative Depreciation 1,281,700 72,000 Earnings before interest and taxes $ 322,400 Interest Earnings before taxes Taxes (at 40%) Net income $ 284,500 113,800 37,900 $ 170,700 1,492,200 86,000 $ 367,100 31,600 $ 335,500 134,200 $201,300