Chapter 3, Problem 20P

a)

Summary Introduction

To discuss: The impact when firm reduces its inventories by $500,000 and invests in marketable securities.

Explanation of Solution

Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$5,750}{\$3,000}\\ =1.92\left(\text{No}\text{change}\right)\end{array}$

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}\\ =\frac{\$5,750-\$2,000}{\$3,000}\\ =1.25\left(\text{Increase}\right)\end{array}$

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{equity}}\\ =\frac{\$4,750}{\$6,000}\\ =0.79\left(\text{No}\text{change}\right)\end{array}$

b)

Summary Introduction

To discuss: The impact, when firm purchases 20 new trucks with $500,000 paying through by selling the marketable securities.

Explanation of Solution

Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$5,250}{\$3,000}\\ =1.75\left(\text{Decrease}\right)\end{array}$

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}\\ =\frac{\$5,250-\$2,500}{\$3,000}\\ =0.92\left(\text{Decrease}\right)\end{array}$

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{equity}}\\ =\frac{\$4,750}{\$6,000}\\ =0.79\left(\text{No}\text{change}\right)\end{array}$

c)

Summary Introduction

To discuss: The impact, when firm borrows the amount of $500,000 from bank as a short-term loan and invests on inventory.

Explanation of Solution

Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$6,250}{\$3,500}\\ =1.79\left(\text{Decrease}\right)\end{array}$

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}\\ =\frac{\$6,250-\$3,000}{\$3,500}\\ =0.93\left(\text{Decrease}\right)\end{array}$

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{equity}}\\ =\frac{\$5,250}{\$6,000}\\ =0.88\left(\text{Increase}\right)\end{array}$

d)

Summary Introduction

To discuss: The impact, when company borrows the amount of $2,000,000 from bank as a five-year loan and has invested to expand its plant.

Explanation of Solution

Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$5,750}{\$3,000}\\ =1.92\left(\text{No}\text{change}\right)\end{array}$

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}\\ =\frac{\$5,750-\$2,500}{\$3,000}\\ =1.08\left(\text{No change}\right)\end{array}$

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{equity}}\\ =\frac{\$6,750}{\$6,000}\\ =1.13\left(\text{Increase}\right)\end{array}$

e)

Summary Introduction

To discuss: The impact, when company sale its common stock amounted to $2,000,000 and used the proceeds to expand its plant.

Explanation of Solution

Calculation of Current ratio, Quick ratio and Debt-to-equity ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$5,750}{\$3,000}\\ =1.92\left(\text{No}\text{change}\right)\end{array}$

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}\\ =\frac{\$5,750-\$2,500}{\$3,000}\\ =1.08\left(\text{No change}\right)\end{array}$

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{equity}}\\ =\frac{\$4,750}{\$8,000}\\ =0.59\left(\text{Decrease}\right)\end{array}$