Below are balance sheets for two firms with similar revenues. Amounts are in millions of dollars. Which firm looks more risky for shareholders? Why?

Firm A

Assets

Cash 17 Accounts receivable 43 Inventory 102 Property, plant and equipment 194 Long-term debt investments 104

-------- 460 =====

Liabilities and Equity

Accounts payable 14 Long-term debt 200

-------- 214

Common equity 246 --------

460 =====

(Source: Penman E19.1; modified slightly.)

Question 2

Firm B

Assets

Cash 15 Accounts receivable 72 Inventory 107 Property, plant and equipment 289

-------- 483 =====

Liabilities and Equity

Accounts payable 37 Long-term debt 200

-------- 237

Common equity 246 --------

483 =====

The statements below are for two firms in the same line of business (in millions of dollars).

Required: -

(a) Analyse the risk drivers in these income statements. Which firm looks more risky for

shareholders? Why?

(b) On the basis of the relationships in these income statements, develop pro forma income

statements under the following scenarios:

(i) Sales drop to $532 million for both firms.

(ii) Sales increase to $2,140 million for both firms. What does this analysis tell you?

Question 1 Below are balance sheets for two firms with similar revenues. Amounts are in millions of dollars. Which firm looks more risky for shareholders? Why? Question 2 The statements below are for two firms in the same line of business (in millions of dollars). Required: - (a) Analyse the risk drivers in these income statements. Which firm looks more risky for shareholders? Why? (b) On the basis of the relationships in these income statements, develop pro forma income statements under the following scenarios: (i) Sales drop to $532 million for both firms. (ii) Sales increase to $2,140 million for both firms. What does this analysis tell you? Question 1 Below are balance sheets for two firms with similar revenues. Amounts are in millions of dollars. Which firm looks more risky for shareholders? Why? (source: renman E 19.1; modiried singntiy.) Question 2 The statements below are for two firms in the same line of business (in millions of dollars). Required: - (a) Analyse the risk drivers in these income statements. Which firm looks more risky for shareholders? Why? (b) On the basis of the relationships in these income statements, develop pro forma income statements under the following scenarios: (i) Sales drop to $532 million for both firms. (ii) Sales increase to $2,140 million for both firms. What does this analysis tell you