Exhibit 1 Hawthorne Business Instruments Financial Data for Year-Ending August 30, 1990 Midwest Percent of Industry Business Total Averages A. Balance Sheet Current assets $ 4,320,000 40% 30% Net fixed assets 6.480.000 60% 70% Total assets $ 10,800,000 100% 100% Current liabilities (8%) Long-term debt (10%) Common equity Total liabilities & common equity $1,404,000 4,320,000 5,076.000 $ 10,800,000 13% 40% 47% 100% 13% 40% 47% 100% B. Income Statement Sales Operating expenses Earnings before interest & taxes Interest Taxable income Taxes (50%) Earnings after taxes $14,400,000 12.240.000 $ 2,160,000 544.320 $ 1,615,680 807,840 $ 807,840 c. Key Ratios Current ratio Return on common equity Operating expenses to sales Debt to total assets 3.08x 15.92% 85.0% 53.0% 2.31x 13.85% 85.0% 53.0% Mr. Edwards proposed three working capital policies for consideration: (1)a conservative policy that would maintain the current working capital structure; (2) an intermediate policy that calls for reducing current assets to the industry average percentage with no change in current liabilities; and (3) a liberal policy that calls for reducing current as- sets by 20 percent and increasing current liabilities by 20 percent. Long-term debt and common equity would be maintained at present levels under all of these policies. The intermediate policy is expected to increase sales by 5 percent, and the liberal policy is expected to increase sales by 10 percent. All finance committee members except Billy Edwards indicated apprehension about any change in working capital policy, but agreed to postpone the final decision on this matter until Mr. Edwards could prepare a more detailed analysis of the possibilities. QUESTIONS 1. Prepare an exhibit that will show (a) the balance sheet, (b) the income statement, and (c) the key ratios for each policy. 2. As current ratio is a measure of liquidity adequacy, does it mean the higher the current ratio, the better position the company is in? 3. Discuss the risk-return tradeoff among the alternative policies. 4. Which of the three alternatives should Mr. Edwards recommend at the next meeting