Q1: Allen Company and Barker Company are competitors in the same industry. Selected financial data from their 2009 statements follow.
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Balance Sheet December 31, 2009
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Allen Company
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Barker Company
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Cash
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$10,000
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$35,000
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Accounts receivable
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45,000
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120,000
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Inventory
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70,000
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190,000
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Investment
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40,000
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100,000
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Intangibles
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11,000
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20,000
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Property, plant, and equipment
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180,000
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520,000
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Total assets
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$356,000
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$985,000
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Accounts payable
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$60,000
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$165,000
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Bonds Payable
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100,000
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410,000
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Preferred stock, $1 par
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50,000
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30,000
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Common stock, $10 par
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100,000
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280,000
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Retained earnings
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46,000
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100,000
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Total liabilities and capital
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$356,000
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$985,000
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Income Statement For the Year Ended December 31,2009
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Allen Company
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Barker Company
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Sales
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$1,050,000
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$2,800,000
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Cost of goods sold
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725,000
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2,050,000
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Selling and administrative expenses
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230,000
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580,000
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Interest expense
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10,000
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32,000
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Income taxes
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42,000
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65,000
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Net income
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$43,000
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$73,000
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Industry Averages:
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Times interest earned
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7.2 times
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Debt ratio
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40.3%
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Debt/equity
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66.6%
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Debt to tangible net worth
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72.7%
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Required -
a. Compute the following ratios for each company:
1. Times interest earned
2. Debt ratio
3. Debt/equity ratio
4. Debt to tangible net worth
b. Is Barker Company in a position to take on additional long-term debt? Explain.
c. Which company has the better long-term debt position? Explain.
Q2. A company has expected cash flows of $1.85 million, $2.25 million, and $2.92 million in the next three years. For Years 4 through 10, the free cash flows will grow by 6% annually. Beginning in Year 11, the expected cash flows will grow by 3% in perpetuity. Measure the value of this company as of today using both a 10% and 12% discount rate.
Q3. Main Street Restaurant Group: A young analyst was asked to measure the return on assets and mum al equity for the operations of the Main Street Restaurant Group by using the abbreviated balance sheets and income statements that appear in Exhibit P2.9. (The company operates TGI Friday's and other restaurants.) Based on this information, the analyst calculated the rates or return using the following formulas
Return on Assets = [Net Income + (1 - Average Tax Rate) x Interest Expense/Average Total Assets]
Return on Equity = Net Income/Average Common Equity
a. Comment on the formulas the analyst used to measure the rates of return on the company's operations shown in the exhibit.
b. Using the information in the exhibit, correctly calculate the return on assets and return on equity for the company's operations, for each year for which you have data available.
c. Calculate the components of the correctly calculated return on assets and return on equity for each year for which you have data available.
Attachment:- Exhibit.rar