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Inventory and Financial Ratios

16. Suppose your firm receives a $5million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4 million within 30 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes).

Revenues
increase by $3 million
increase by $4 million
increase by $5 million
increase by $1 million
decrease by $2 million

Earnings
increase by $3 million
increase by $4 million
increase by $5 million
increase by $1 million
decrease by $2 million

Receivables
increase by $3 million
increase by $4 million
increase by $5 million
increase by $1 million
decrease by $2 million

Inventory
increase by $3 million
increase by $4 million
increase by $5 million
increase by $1 million
decrease by $2 million
Cash
increase by $3 million
increase by $4 million
increase by $5 million
increase by $1 million
decrease by $2 million

12. In July 2005, American Airlines (AMR) had a market capitalization of 2.3 billion, debt of $14.3 billion and cash of $3.1 billion. American Airlines had revenues of $18.9 billion. British Airways, (BAB) had a market capitalization of $5.2 billion, debt of $8.0 billion, cash of $2.9 billion and revenues of $13.6 billion.

Market capitalization-to-revenue ratio for American Airlines
0.71
0.38
0.76
0.12

Market capitalization-to-revenue ratio for British Airways

0.71
0.38
0.76
0.12

Enterprise value-to-revenue ratio for American Airlines
0.71
0.38
0.76
0.12

Enterprise value-to-revenue ratio for British Airways
0.71
0.38
0.76
0.12

Market capitalization-to-revenue ratio for American Airlines
0.71
0.38
0.76
0.12

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Solution Summary

This solution explains how to measure revenues, earnings, receivables, inventory, and cash changes based on a transaction. This solution also explains how to calculate market cap-to-revenue and enterprise value-to-revenue

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