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University of Colorado, BoulderFNCE 3010solve03

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FNCE 3010 (Durham). HW3 (Financial ratios) 1. What efiect would the following actions have on a flrms net working capital and current ratio (assume NWC is positive and current ratio is initially gr... eater than 1)? (a) Inventory is purchased. (b) A supplier is paid. (c) A short-term bank loan is repaid. (d) A long-term debt is paid ofi early. (e) A customer pays ofi a credit account. (f) Inventory is sold at cost. (g) Inventory is sold for a proflt. Solution: (a) NWC is unchanged. If inventory is purchased with cash, then there is no change in the current ratio. If inventory is purchased on credit, then there is a decrease in the current ratio if it was initially greater than 1.0. (b) NWC is unchanged. Reducing accounts payable with cash increases the current ratio if it was initially greater than 1.0. (c) NWC is unchanged. Reducing short-term debt with cash increases the current ratio if it was initially greater than 1.0. (d) NWC and current ratio decrease. (e) NWC and current ratio are unchanged. (f) NWC and current ratio are unchanged. (g) NWC and current ratio increase. 2. Explain what peer group analysis means. As a flnancial manager, how could you use the results of peer group analysis to evaluate the performance of your flrm? How is a peer group difierent from an aspirant group? Solution: [Show More]

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