Reading 27: Analysis of Financial Statements: A Synthesis

border, recent, provided, investment

Q12. Melinda McKay, CFA, an analyst at Integrity Equity, is considering an investment in Earthmovers Inc., whose most recent

financial data is provided below.

Earthmovers Inc. Income Statement Year ended Dec 31, 2006 ($U.S. thousands)
Revenues	20,152
Gross profit	10,022
Operating income	4,819
Depreciation	823
Interest expense	1,040
Income before taxes	2,956
Taxes	887
Net Income	2,069

Earthmovers Inc. Balance Sheet Year ended Dec 31, 2006 ($U.S. thousands)
Assets		Liabilities & Owner’s Equity
Cash	600	Accounts payable	5,500
Marketable Securities	200	Notes payable	3,500
Accounts Receivable	8,500	Total current liabilities	9,000
Inventories	3,500
Total current assets	12,800	Long-term debt	13,000

Net P,P&E	17,000	Preferred stock (100,000 shares)	1,000
Pension Asset	1,500	Common Stock (500,000 shares)	2,000
Intangible Assets	1,000	Retained earnings	8,300
Goodwill	1,000	Total stockholder’s equity	11,300
Total Assets	33,300	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.

Q13. What is the value of the current ratio using the adjusted data?

A) 1.45.

B) 1.54.

C) 1.41.