1. Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:

	Island	Burger	Fink	Roland
Ratio	Electric Utility	Heaven	Software	Motors
Current ratio	1.06	1.35	6.79	4.55
Quick ratio	0.92	0.87	5.23	3.73
Debt ratio	0.69	0.45	0.04	0.34
Net profit margin	6.25%	14.33%	28.46%	8.43%

Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out.

1. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? (Select all the answers that apply.) (0.25 Marks)

1. A high level of debt can be maintained if the firm has a large, predictable, and steady cash flow.
2. The software firm will have very uncertain and changing cash flow.
3. Utilities tend to have steady cash flow requirements.
4. The software industry is subject to greater competition resulting in more volatile cash flow.