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Q12. Melinda McKay, CFA, an analyst at Integrity Equity, is considering an investment in Earthmovers Inc., whose most recent ffice ffice" />
financial data is provided below.
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Earthmovers Inc.
Income Statement
Year ended Dec 31, 2006
($ffice:smarttags" />U.S. thousands) |
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Revenues |
20,152 |
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Gross profit |
10,022 |
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Operating income |
4,819 |
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Depreciation |
823 |
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Interest expense |
1,040 |
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Income before taxes |
2,956 |
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Taxes |
887 |
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Net Income |
2,069 |
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Earthmovers Inc.
Balance Sheet
Year ended Dec 31, 2006
($U.S. thousands) |
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Assets |
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Liabilities & Owner’s Equity |
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Cash |
600 |
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Accounts payable |
5,500 |
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Marketable Securities |
200 |
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Notes payable |
3,500 |
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Accounts Receivable |
8,500 |
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Total current liabilities |
9,000 |
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Inventories |
3,500 |
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Total current assets |
12,800 |
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Long-term debt |
13,000 |
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Net P,P&E |
17,000 |
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Preferred stock (100,000 shares) |
1,000 |
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Pension Asset |
1,500 |
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Common Stock (500,000 shares) |
2,000 |
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Intangible Assets |
1,000 |
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Retained earnings |
8,300 |
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Goodwill |
1,000 |
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Total stockholder’s equity |
11,300 |
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Total Assets |
33,300 |
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Total liabilities & Equity |
33,300 |
The footnotes to Earthmovers Inc. include the following information:
- Inventories are valued at cost under the last in, first out (LIFO) method, the LIFO reserve is $1.2 million, up $120,000 from the previous year.
- Capitalized interest for 2006 is $550,000.
- Earthmovers recently sold $400,000 worth of accounts receivable with recourse. To date only $100,000 has been collected.
- The funded status of the pension fund is a pension liability of $1,000,000.
- Due to an increase in yields on corporate debt, the market value of the long-term debt is $12.35 million.
- The preferred stock is redeemable at the option of the preferred stockholder.
- The market value of the preferred stock is $9.50.
- Management viewed the potential liability of $5 million associated with a pending lawsuit as an improbable event. There is no insurance in place to cover any potential loss.
Following the release of the financial statements, Earthmovers publicly acknowledged that the loss related to the lawsuit was a probable event and was working out a settlement for $3 million.
What is the value of the times interest earned ratio (earnings before interest, tax, depreciation and amortization (EBITDA) / interest expense) using the adjusted data?
A) 2.8.
B) 3.0.
C) 4.6.
Correct answer is A)
The income statement needs the following adjustments:
§ Capitalized interest should be included on the income statement. Inclusion will not affect EBITDA but will increase interest expense to 1,590,000 (1,040,000 + 550,000).
§ EBITDA should be reduced by $300,000 ($400,000 ? $100,000) to $4,519,000 due to the sale of accounts receivable that are yet to be collected.
Therefore, EBITDA / interest expense is 2.8 (= 4,519,000 / 1,590,000).
Q13. What is the value of the current ratio using the adjusted data?
A) 1.45.
B) 1.54.
C) 1.41.
Correct answer is B)
Current assets need the following adjustments:
§ Increase accounts receivable by $300,000 for the uncollected receivables sold with recourse.
§ Increase inventories by the amount of the LIFO reserve or $1.2 million to reflect first in, first out (FIFO) accounting.
Current liabilities should increase by $300,000 to reflect the “borrowing” related to the sale of the receivables.
The adjusted current ratio is 1.54 [(12,800,000 + 300,000 + 1,200,000) / (9,000,000 + 300,000)]
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发表于 2009-3-3 12:53
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