Working capital : This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted. Formula of working capital: Working capital = Current assets + Current liabilities 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: Current ratio = Current assets Current liabilities 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: Debt to assets ratio = Total liabilities 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: Free cash flow = { Net cash provided by operating activities − Capital expenditures − Dividends } 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). Formula of EPS: EPS = Net income − Preferred dividends Weighted average common shares outstanding To compute : (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Company H and Company T for 2011

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Chapter 2, Problem 2.2BYP

(a)

To determine

Working capital: This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted.

Formula of working capital:

Working capital=Current assets+Current liabilities

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:

Current ratio=Current assetsCurrent liabilities

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:

Debt to assets ratio=Total liabilitiesTotal 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:

Free cash flow={Net cash provided by operating activities−Capital expenditures−Dividends}

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).

Formula of EPS:

EPS=Net income−Preferred dividendsWeighted average common shares outstanding

To compute: (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Company H and Company T for 2011

(b)

To determine

To analyze: The liquidity and solvency position of two companies based on the computed ratios

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