Working capital : The measure which evaluates the ability of a company to pay off the short-term debt obligations, by computing the excess of current assets over current liabilities is referred to as working capital. This ratio assesses the liquidity of a company. 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 Free cash flow : This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends. This ratio assesses the solvency of a company. Formula of free cash flow: Free cash flow = { Net cash provided by operating activities − Capital expenditures − Dividends } 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 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). This ratio assesses the profitability of a company. Formula of EPS: EPS = Net income − Preferred dividends Weighted average common shares outstanding To compute : (a) (i) Current ratio, (ii) working capital (iii) debt to assets ratio (iv) free cash flow (v) earnings per share for Company D for the year 2014

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Chapter 2, Problem 2.5BP

(a)

To determine

Working capital: The measure which evaluates the ability of a company to pay off the short-term debt obligations, by computing the excess of current assets over current liabilities is referred to as working capital. This ratio assesses the liquidity of a company.

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

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

Formula of free cash flow:

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

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

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). This ratio assesses the profitability of a company.

Formula of EPS:

EPS=Net income−Preferred dividendsWeighted average common shares outstanding

To compute: (a) (i) Current ratio, (ii) working capital (iii) debt to assets ratio (iv) free cash flow (v) earnings per share for Company D for the year 2014

(b)

To determine

Compare the changes in liquidity, solvency, and profitability of 2014 with the values of 2013

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