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# Ratios/cash budget/dividends

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Robert recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now
invested, Robert performs a ratio analysis on each one and decides to compare them on each other. Some of his ratios are listed
below.
Ratio Island Electric Utility Burger Haven Fink Software
Current Ratio 1.10 1.30 6.80
Quick Ratio 0.90 0.82 5.20
Debt Ratio 0.68 0.46 0.00
Net Profit Margins 6.2% 14.3% 28.5%

Assuming that his uncle was a wise investor who assembled the potfolio with care, Robert finds the wide differences in these
ratios confusing. Help him out.

A. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios?

B. Why might the current and quick ratios for the electric utility and fast food stock be so much lower than the same ratios
for the other companies?

C. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company?

D. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies?
( Focus on Risk and Return).
Company ABC expects sales of \$100,000 during each of the next three months. It will make monthly purchases of
\$60,000 during this time. Wages and salaries are \$10,000 per month plus 5% of sales. ABC expects to make a tax payment of
\$20,000 in the next month and \$15,000 purchase of fixed assets in the second month and to receive \$8,000 in case for the sale of
an asset in the third month. All sales and purchases are for cash. Beginning cash and minimum cash balance are assumed
to be 0.

A. Construct a cash budget for the next three months.

B. Company ABC is unsure of the sales levels , but other figures are certain. If the most pessimistic sales figure are
\$80,000 per month and the most optimistic is \$120,000 per month, what are the monthly minimum and maximum ending
cash balances that the firm can expect for each of the 1-month periods?

C. Briefly discuss how the financial manager can use the data in parts a and b to plan for financing needs.
The Company stockholder's equity accounts follows:

Common Stock ( 400,000 shares at \$4 par
Paid in Capital in excess of par
Retained Earnigs
Total stockholders' equity

The earnings for common stockholders from this period's operations are \$100,000 which have been included as part of the \$1.9 million retained
earnings.

A. What is the maximum dividend per share that the firm can pay?(Assume that legal capital includes all paid-in capital)

B. If the firm has \$160,000 in cash what is the largest per share dividend it can pay without borrowing?

C. Indicate the accounts and changes, if any, that will result if the firm pays the dividend indicated in part a and b.

D. Indicate the effects of an \$80,000 cash dividend on stockholders equity.