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Various Finance Questions

1- What should you consider when comparing fixed assets turnover of one firm to others? In other words, can you simply compare the ratios and explore the differences or should we strive to learn more before conducting such an analysis?

2 - Class, do you think it is easier to manipulate ratios that come from the balance sheet or from the income statement? Please support your view.

3 - Do you think the percentage of sales method may be more or less accurate in predicting the company's likely balance sheet?

4 - Carter Corporation 's sale to increase from $5 millions in 2004 to $6 millions in 2005, or by 20%. It's assets totaled $3 millions at the end of 2004. Carter is at full capacity, so it's assets must grow the same rate as projected sales.
At the end of 2004, current liabilities were $1 millions, consisting of $250,000 of notes payables, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%.

*Use the AFN formula to forecast Carter's additional funds need for the coming year.

Solution Preview

1-What should you consider when comparing fixed assets turnover of one firm to others? In other words, can you simply compare the ratios and explore the differences or should we strive to learn more before conducting such an analysis?

When comparing fixed assets turnover of one firm to others, we should strive to learn more about the business type of each firm as well as the industry's fixed assets turnover. We cannot just simply compare the ratios and explore the differences because each firm might have different amount of investment in fixed assets and might be different in size. Furthermore, a potential problem exists when interpreting the fixed assets turnover ratio. As the fixed assets reflect the historical costs of the assets, the inflation will cause the value of many fixed assets in the past to be understated. Therefore, if we compare an old firm which had acquired its fixed assets years ago at low prices with a new firm which had acquired its fixed assets only recently, we would find ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer the requirement of various finance questions.

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