QUESTION 1 (MODULE 1 - FINANCIAL STATEMENTS AND RATIO ANALYSIS): A company considers large investment (building a new factory), for which it needs new funds. The company's managers consider two financing options: borrowing a loan from a bank or issuing new shareholder's equity. The funds needed amount to 5.000 EUR. On the ground of the following accounting information about the company answer the following questions: 1) Can the company afford more borrowing (or should it rather issue new equity), in light of its current financial risks? To answer this question, compute and interpret the following three ratios: total indebtedness ratio, current liquidity ratio, EBITDA-to-total-liabilities ratio). 2) Did any of these three ratios approach or breach its safety threshold in 2014-2016? Company's financial statements: Income statement Sales revenues 2014 2015 10 000 12 000 2016 14 000 Cost of goods sold Depreciation and amortization Administrative and selling costs 7 000 8 000 9 000 600 800 800 1 800 2 000 3 300 Profit on sales 600 1 200 900 Financial costs Pre-tax earnings Income tax 100 150 250 500 1 050 650 160 250 230 Net earnings 340 800 420 Balance sheet 31.12.2014 31.12.2015 31.12.2016 Fixed assets 4 000 7 000 7 500 Current assets, including: 3 000 3 500 4 000 Inventory 2 500 3 000 3 000 Cash 500 500 1 000 TOTAL ASSETS 7 000 10 500 11 500 Shareholder's equity 3 000 3 300 3 600 Long-term liabilities 500 1 000 1 400 Short-term liabilities, including: 3 500 6 200 6 500 Trade payables 1 500 2 500 3 500 Bank borrowings 2 000 3 700 3 000 TOTAL EQUITY AND LIABILITIES 7 000 10 500 11 500
QUESTION 1 (MODULE 1 - FINANCIAL STATEMENTS AND RATIO ANALYSIS): A company considers large investment (building a new factory), for which it needs new funds. The company's managers consider two financing options: borrowing a loan from a bank or issuing new shareholder's equity. The funds needed amount to 5.000 EUR. On the ground of the following accounting information about the company answer the following questions: 1) Can the company afford more borrowing (or should it rather issue new equity), in light of its current financial risks? To answer this question, compute and interpret the following three ratios: total indebtedness ratio, current liquidity ratio, EBITDA-to-total-liabilities ratio). 2) Did any of these three ratios approach or breach its safety threshold in 2014-2016? Company's financial statements: Income statement Sales revenues 2014 2015 10 000 12 000 2016 14 000 Cost of goods sold Depreciation and amortization Administrative and selling costs 7 000 8 000 9 000 600 800 800 1 800 2 000 3 300 Profit on sales 600 1 200 900 Financial costs Pre-tax earnings Income tax 100 150 250 500 1 050 650 160 250 230 Net earnings 340 800 420 Balance sheet 31.12.2014 31.12.2015 31.12.2016 Fixed assets 4 000 7 000 7 500 Current assets, including: 3 000 3 500 4 000 Inventory 2 500 3 000 3 000 Cash 500 500 1 000 TOTAL ASSETS 7 000 10 500 11 500 Shareholder's equity 3 000 3 300 3 600 Long-term liabilities 500 1 000 1 400 Short-term liabilities, including: 3 500 6 200 6 500 Trade payables 1 500 2 500 3 500 Bank borrowings 2 000 3 700 3 000 TOTAL EQUITY AND LIABILITIES 7 000 10 500 11 500
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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