The financial statements and industry norms are shown below for OPW, Inc.: Table 1: Financial Ratios for the Industry Norm INDUSTRY NORM Current ratio 5.00 Acid-test (quick) ratio 3.00 Inventory turnover 2.20 Average collection period 90.00 Debt ratio 0.33 Times interest earned 7.00 Total asset turnover 0.75 Fixed-asset turnover 1.00 Operating profit margin 20% Return on common equity 9% Debt ratio is the total debt over the total asset Table 2: The Balance Sheet of OPW at 31/12/2018 and 31/12/2019 Asset 2018 Cash $200 Accounts receivable 450 Inventory 550 Current assets $1,200 Plant and equipment Less accumulated depreciation Net plant and equipment $1,200 Total Total ecsete $2.400 $2,200 (1,000) $2,600 (1,200) 2019 $150 425 625 $1,200 $1,400 60.500 Table 3: The Income Statement of OPW at 31/12/2018 and 31/12/2019 2018 Sales* $1,200 $1,450 Cost of goods sold 700 850 Gross profit $500 $600 Operating (expenses) Depreciation 220 250 240 Operating profits $250 $360 Interest expense (50) (64) Net income before taxes $200 $ 296 Taxes (40%) 80 118 Net income $120 $ 178 *15% of sales are cash sales, with the remaining 85% being credit sales. a. Compute the financial ratios for OPW to compare both for 2018 and 2019 against the industry norms. [10] b. Discuss how liquid the firm is. [5] c. Discuss how the firm financed its assets. [7] d. Are its managers generating an adequate operating profit on the firm's assets and a good return on equity? Explain your answer. [8] (30) (40) 200 2019 a. Compute the financial ratios for OPW to compare both for 2018 and 2019 against the industry norms. [10] b. Discuss how liquid the firm is. [5] c. Discuss how the firm financed its assets. [7] d. Are its managers generating an adequate operating profit on the firm's assets and a good return on equity? Explain your answer. [8] e. Estimate the fundamental value of each ordinary share of OPW, Inc. on 31 December 2019 using the residual income model with the following assumptions : 1. The CAPM equity beta of OPW, Inc. is 1.2. II. The UK government's 10-year treasury bill rate is 3%. III. The market risk premium is 6%. IV. The market value of its ordinary shares is 2,500 million on 31 December 2019. And its total number of ordinary shares outstanding is 2000 million. V. HSBC predicts that the annual growth rate of OPW, Inc.'s residual income for the next 5 years are: 0.6% in 2020, 0.5% in 2021, 0.6% in 2022, 0.8% in 2023, and the growth rate of its residual income is assumed to be 1% in 2024. Do you recommend OPW, Inc. as a suitable investment for your client? Explain your [10] answer. The financial statements and industry norms are shown below for OPW, Inc.: Table 1: Financial Ratios for the Industry Norm INDUSTRY NORM Current ratio 5.00 Acid-test (quick) ratio 3.00 Inventory turnover 2.20 Average collection period 90.00 Debt ratio 0.33 Times interest earned 7.00 Total asset turnover 0.75 Fixed-asset turnover 1.00 Operating profit margin 20% Return on common equity 9% Debt ratio is the total debt over the total asset Table 2: The Balance Sheet of OPW at 31/12/2018 and 31/12/2019 Asset 2018 Cash $200 Accounts receivable 450 Inventory 550 Current assets $1,200 Plant and equipment Less accumulated depreciation Net plant and equipment $1,200 Total Total ecsete $2.400 $2,200 (1,000) $2,600 (1,200) 2019 $150 425 625 $1,200 $1,400 60.500 Table 3: The Income Statement of OPW at 31/12/2018 and 31/12/2019 2018 Sales* $1,200 $1,450 Cost of goods sold 700 850 Gross profit $500 $600 Operating (expenses) Depreciation 220 250 240 Operating profits $250 $360 Interest expense (50) (64) Net income before taxes $200 $ 296 Taxes (40%) 80 118 Net income $120 $ 178 *15% of sales are cash sales, with the remaining 85% being credit sales. a. Compute the financial ratios for OPW to compare both for 2018 and 2019 against the industry norms. [10] b. Discuss how liquid the firm is. [5] c. Discuss how the firm financed its assets. [7] d. Are its managers generating an adequate operating profit on the firm's assets and a good return on equity? Explain your answer. [8] (30) (40) 200 2019 a. Compute the financial ratios for OPW to compare both for 2018 and 2019 against the industry norms. [10] b. Discuss how liquid the firm is. [5] c. Discuss how the firm financed its assets. [7] d. Are its managers generating an adequate operating profit on the firm's assets and a good return on equity? Explain your answer. [8] e. Estimate the fundamental value of each ordinary share of OPW, Inc. on 31 December 2019 using the residual income model with the following assumptions : 1. The CAPM equity beta of OPW, Inc. is 1.2. II. The UK government's 10-year treasury bill rate is 3%. III. The market risk premium is 6%. IV. The market value of its ordinary shares is 2,500 million on 31 December 2019. And its total number of ordinary shares outstanding is 2000 million. V. HSBC predicts that the annual growth rate of OPW, Inc.'s residual income for the next 5 years are: 0.6% in 2020, 0.5% in 2021, 0.6% in 2022, 0.8% in 2023, and the growth rate of its residual income is assumed to be 1% in 2024. Do you recommend OPW, Inc. as a suitable investment for your client? Explain your [10]