Reference no: EM131234024

Q1: Allen Company and Barker Company are competitors in the same industry. Selected financial data from their 2009 statements follow.

Balance Sheet December 31, 2009
	Allen Company	Barker Company
Cash	$10,000	$35,000
Accounts receivable	45,000	120,000
Inventory	70,000	190,000
Investment	40,000	100,000
Intangibles	11,000	20,000
Property, plant, and equipment	180,000	520,000
Total assets	$356,000	$985,000
Accounts payable	$60,000	$165,000
Bonds Payable	100,000	410,000
Preferred stock, $1 par	50,000	30,000
Common stock, $10 par	100,000	280,000
Retained earnings	46,000	100,000
Total liabilities and capital	$356,000	$985,000

 

Income Statement For the Year Ended December 31,2009
	Allen Company	Barker Company
Sales	$1,050,000	$2,800,000
Cost of goods sold	725,000	2,050,000
Selling and administrative expenses	230,000	580,000
Interest expense	10,000	32,000
Income taxes	42,000	65,000
Net income	$43,000	$73,000
Industry Averages:
Times interest earned		7.2 times
Debt ratio		40.3%
Debt/equity		66.6%
Debt to tangible net worth		72.7%

Required -

a. Compute the following ratios for each company:

1. Times interest earned

2. Debt ratio

3. Debt/equity ratio

4. Debt to tangible net worth

b. Is Barker Company in a position to take on additional long-term debt? Explain.

c. Which company has the better long-term debt position? Explain.

Q2. A company has expected cash flows of $1.85 million, $2.25 million, and $2.92 million in the next three years. For Years 4 through 10, the free cash flows will grow by 6% annually. Beginning in Year 11, the expected cash flows will grow by 3% in perpetuity. Measure the value of this company as of today using both a 10% and 12% discount rate.

Q3. Main Street Restaurant Group: A young analyst was asked to measure the return on assets and mum al equity for the operations of the Main Street Restaurant Group by using the abbreviated balance sheets and income statements that appear in Exhibit P2.9. (The company operates TGI Friday's and other restaurants.) Based on this information, the analyst calculated the rates or return using the following formulas

Return on Assets = [Net Income + (1 - Average Tax Rate) x Interest Expense/Average Total Assets]

Return on Equity = Net Income/Average Common Equity

a. Comment on the formulas the analyst used to measure the rates of return on the company's operations shown in the exhibit.

b. Using the information in the exhibit, correctly calculate the return on assets and return on equity for the company's operations, for each year for which you have data available.

c. Calculate the components of the correctly calculated return on assets and return on equity for each year for which you have data available.

Attachment:- Exhibit.rar