Financial Accounting: In an Economic Context

PROBLEMS

REAL DATA

P5–1

Computing and interpreting ratios

Imation, a global technology company, reported the following selected items as part of its 2008 annual report (dollars in millions):

REQUIRED:

Compute the following ratios:

1. Current ratio
2. Quick ratio
3. Receivable turnover (time and days)
4. Interest coverage
5. Return on assets
6. Inventory turnover (times and days)
7. Return on equity

P5–2

Borrow or issue equity: effects on financial ratios

Edgemont Repairs began operations on January 1, 2010. The 2010, 2011, and 2012 financial statements follow:

On January 1, 2012, the company expanded operations by taking out a $40,000 long-term loan at a 10 percent annual interest rate.

REQUIRED:

a. Compute return on equity, return on assets, common equity leverage, capital structure leverage, profit margin, and asset turnover.

b. On January 1, 2012, the company's common stock was selling for $20 per share. Assume that Edgemont issued 2,000 shares of stock, instead of borrowing the $40,000, to raise the cash needed to pay for the January 1 expansion. Recompute the ratios in (a) for 2012. Ignore any tax effects.

c. Should the company have issued the equity instead of borrowing the funds? Explain.

REAL ...