Financial decisions on southwick current

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Reference no: EM131118000

The Southwick Company has the following balance sheet ($000):

Assets


Liabilities and StockholdersEquity



Cash

$ 500

Accounts payable

$ 1,750

Marketable securities

750

Notes payable

1,250


Accounts receivable

2,000

Total current liabilities

$ 3,000


Inventory

2,500

Long-term debt

1,750


Total current assets

$ 5,750

Total liabilities

$ 4,750


Plant and equipment (net)

5,000

Common stock ($1 par)

1,000


Total assets

$10,750

Contributed capital in excess of par

2,000




Retained earnings

3,000




Total stockholders' equity

$ 6,000




Total liabilities and stockholders' equity

$10,750


Financial Ratios

Evaluate the impact of each of the following (independent) financial decisions on Southwick's current, quick, and debt-to-equity ratios:

a. The firm reduces its inventories by $500,000 through more efficient inventory management procedures and invests the proceeds in marketable securities.

b. The firm decides to purchase 20 new delivery trucks for a total of $500,000 and pays for them by selling marketable securities.

c. The firm borrows $500,000 from its bank through a short-term loan (seasonal financing) and invests the proceeds in inventory.

d. Southwick borrows $2 million from its bank through a 5-year loan (interest due annually, principal due at maturity) and uses the proceeds to expand its plant.

e. The firm sells $2 million (net) in common stock and uses the proceeds to expand its plant.

Reference no: EM131118000

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