Balance Sheet ABC CORPORATION June 30, 1988 Assets Liabilities Cash $165,000 Accounts payable $166,000 Marketable securities 18,000 Accrued taxes 70,000 Accounts receivable 260,000 Notes payable 84,000 Inventory 455,000 Accrues Expenses 151,000 Total Current Assets $898,000 Total current Liabilities $471,000 First mortgage bonds: 500,000 7 1/2% ----due 1/1/94 Total Liabilities $971,000 Property, plant and equipment: Stockholders' Equity Land $ 75,000 Buildings 506,000 Equipment 89,000 Preferred stock 100,000 Machinery 164,000 ($100 par) 834,000 1,000 shares authorized, issued , and outstanding Less: Accumulated -217,000 Common Stock ($25 par) 300,000 Depreciation 12,000 shares authorized, issued and outstanding Net property, plant & $ 617,000 Equipment Paid-in capital 58,000 Intangibles 204,000 Accumulated retained 290,000 earnings Total Assets $1,719,000 Total stockholders' $ 748,000 _________ equity Total liabilities and Stockholders' equity $ 1,719,000 __________ a- ABC's capitalization or capital structure b- ABC's working capital c- ABC's current ratio d- ABC's Acid-test ratio 2

1.Using the Data in the Balance Sheet Attached, figure out the following:

a- ABC's capitalization or capital structure

Long-term debt ratio =Long-term debt/ (Long-term debt + Total Equity)

Long term debt= $500,000
Total Equity= $748,000
$1,248,000

Long-term debt ratio =Long-term debt/ (Long-term debt + Total Equity)= 0.40 =500000 / 1248000

b- ABC's working capital

Current Assets= $898,000
Current Liabilities= $471,000
Working Capital = Current Assets- Current Liabilities= $427,000 =898000 - 471000

c- ABC's current ratio

Current ratio = Current Assets ÷ Current Liabilities= 1.91 =898000 ÷ 471000

d- ABC's Acid-test ratio

Acid-test ratio = (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities
Or Acid-test ratio = (Current Assets - Inventory) ÷ Total current liabilities

Current Assets= $898,000
Inventory= $455,000
Current Assets-Inventory= $443,000

Current Liabilities= $471,000
Quick ratio = (Current Assets- Inventory) ÷ Current Liabilities= 0.94 =898000÷ 471000

2. Assuming that the following is the Income Statement for ABC Corporation is :
                                            Income Statement
                                            ABC Corporation
                                            June 87 - June 88

Net Sales                        $60,000
Cost of goods sold           $10,000
General Operating Expenses $30,000 $40,000

Operating Income                $20,000
          Interest expenses        $4,000
Pretax Income        $16,000
          Taxes                $6,000
Net Income after tax        $10,000
          Preferred Dividend        $1,000

Earning Available to Common        $9,000

a- What is ABC's EPS?

Earning Available to Common =       $9,000
# of shares outstanding= 12,000
Therefore, EPS= $0.75 =9000/12000

b- What is ABC's return on equity?

Net Income available to common shareholders= $9,000

Common equity

Common Stock ($25 par) 300,000
12,000 shares authorized,
issued and outstanding

Paid-in capital 58,000
Accumulated retained earnings 290,000
Total Common equity= 648,000

Therefore, ROE = 1.39% =9000/648000

c- What is ABC's preferred dividend rate?

Preferred dividend= $1,000
Preferred stock= $100,000

Therefore, Preferred dividend rate= 1.00% =1000/100000

d- What is ABC's book value per share?

Common equity

Common Stock ($25 par) $300,000
12,000 shares authorized,
issued and outstanding

Paid-in capital $58,000
Accumulated retained earnings $290,000
Total Common equity= $648,000

# of shares outstanding= 12,000

Therefore, Book value per share= $54 =648000/12000

3. If you are in a 28% tax bracket, which of the following two investments you pick
a- A $10,000 Municipal Bond with 7% coupon rate, or
b- A $10,000 Corporate Bond with 8.5% coupon rate?

Corporate bond
Coupon= 8.50%
Tax rate= 28%
After tax rate = 6.12% = (1- 0.28) x 8.5%

Municipal bonds are tax free
Municipal Bonds
Coupon= 7.00%
Tax rate= 0%
After tax rate = 7.00% = (1- 0) x 7.%

Therefore, Municipal Bond is more attractive

4. What is the tax-free yield equivalent of a taxable 9.2% corporate bond for an individual in a 25% tax bracket?

Coupon= 9.20%
Tax rate= 25%
After tax rate = 6.90% = (1- 0.25) x 9.2%

Therefore, tax-free equivalent= 6.90%

PFA