Question
following balance sheet: Assets Liabilities & Stockholders Equity Cash $ 500 Accounts payable $ 1,750 Marketable securities 700 Notes payable 3,250 Accounts receivable 5,150 Total
following balance sheet:
Assets Liabilities & Stockholders Equity
Cash $ 500 Accounts payable $ 1,750
Marketable securities 700 Notes payable 3,250
Accounts receivable 5,150 Total current liabilities $ 5,000
Inventory $ 9,650 Long-term debt 16,000
Total current assets $ 16,000 Total liabilities $ 21,000
Plant & equipment (net) 19,000 Common Stock ($1 par) 1,000
Total assets $ 35,000 Contributed capital in excess of par 4,000
Retained earnings 9,000 Total stockholders equity $14,000
Total liabilities and
stockholders equity $35,000
Financial Ratios______________________
Current ratio 3.20
Quick ratio 1.27
Debt-to-equity ratio 1.50
ROE 22%
___________________________________
Calculate the new values for the current, quick, and debt-to equity ratios and the ROE due to the immediate impact of each of the following financial decisions; in each case, go back to the original numbers and then answer the question.
- The firm reduces its inventories by $500 through more efficient inventory management procedures and invests the proceeds in marketable securities.
- The firm decides to purchase 20 new delivery trucks for a total of $500 and pays for them by selling marketable securities.
- The firm borrows $500 from its bank through a short-term loan (seasonal financing) and uses the proceeds to buy inventory.
- Pioneer borrows $2,000 from its bank through a 5-year loan (interest due annually, principal due at maturity) and uses the proceeds to expand its plant.
- The firm issues $2,000 (net) in common stock and uses the proceeds to expand its plant
- The firm gets a long-term loan of $1,000 and uses the proceeds to buy back $1,000 of its outstanding Common Stock.
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