1. Sometimes analysts use the average of capital at the start and end of the year to calculate return on capital. Provide some examples to illustrate when this does and does not make sense. ( Hint: Start by assuming that capital increases solely as a result of retained earnings.)
2. Take another look at Geomorphic Trading’s balance sheet in Problem 10 and consider the following additional information:
Current Assets Current Liabilities Other Liabilities | |||||
Cash | $15 | Payables | $35 | Deferred tax | $32 |
Inventories | 35 | Taxes due | 10 | Unfunded pensions | 22 |
Receivables | 50 | Bank loan | 15 | R&R reserve | 16 |
$100 | $60 | $70 |
The “R&R reserve” covers the future costs of removal of an oil pipeline and environmental restoration of the pipeline route. There are many ways to calculate a debt ratio for Geomorphic. Suppose you are evaluating the safety of Mesomorph’s debt and want a debt ratio for comparison with the ratios of other companies in the same industry. Would you calculate the ratio in terms of total liabilities or total capitalization? What would you include in debt—the bank loan, the deferred tax account, the R&R reserve, the unfunded pension liability? Explain the pros and cons of these choices.
No comments:
Post a Comment