Chapter 2, Problem 2.11E

(a)

To determine

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Use the following formula to compute EPS:

$\text{EPS}=\frac{\text{Net income}-\text{Preferred dividends}}{\text{Weighted average common shares outstanding}}$

Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.

Formula of debt to assets ratio:

$\text{Debt to assets ratio}=\frac{\text{Total liabilities}}{\text{Total assets }}$

Free cash flow: This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends.

Formula of free cash flow:

$\text{Free cash flow}=\left\{\begin{array}{l}\text{Net cash provided by operating activities}-\\ \text{Capital expenditures}-\\ \text{Dividends}\end{array}\right\}$

To determine: (a) Current ratio of Company AE for 2013 and 2014

(b)

To determine

EPS of Company AE for 2013 and 2014

(c)

To determine

Deb to assets ratio of Company AE for 2013 and 2014.

(d)

To determine

free cash flow of Company AE for 2013 and 2014.

(e)

To determine

Comment on the changes in solvency from 2013 to 2014

(f)

To determine

Analyze the ability of Company AE in meeting its investment requirements and explain how Company AE would overcome at times of deficiency