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Question 1 (a) The table below shows the ratios for four companies: retail jewelry, advertising agency, heavy equipment manufacturer, bank. 4 1.1 Debt-equity Inventory Turnover
Question 1 (a) The table below shows the ratios for four companies: retail jewelry, advertising agency, heavy equipment manufacturer, bank. 4 1.1 Debt-equity Inventory Turnover Current Ratio Sales/Total Assets Sales/Receivables COMPANY 1 2 3 9.0 2.0 0.7 2.5 4.0 N.A. 0.1 2.0 12.0 50.0 1.6 2.0 1.8 5.0 1.8 4.5 9.0 Interpret the ratios and briefly discuss why company 1 should be the bank. (4 marks) (b) Interpret the ratios in the table shown in part (a) to identify the remaining three firms and briefly discuss your reasons using the following format: Company (Number) is the Reason: (12 marks) (c) Mogdiliani and Miller (MM) Proposition 1 with taxes suggests that the optimal capital structure should be close to 100% debt. Yet the companies (with the exception of Company 1) in the table in part (a) have debt levels very much less than 100%, as shown by the debt-equity ratios. Briefly explain by giving one (1) reason why this is the case. (4 marks)
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