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Debt and Assets Analysis

Sepracor Inc, a drug company reported the following information. The company prepares the financial statement in accordance with GAAP.
Current Liabilities.....................................$554,114
Convertible subordinated debt...................648,020
Total liabilities..........................................1,228,313
Stockholders equity...................................176.413
Net income...................................................58,333

Analysis attempting to compare Seprator to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.
Instruction:

(A) Compute the following ratios for Seprator Inc. ( Assume that year-end balances approximate annual averages)
(1) Return on assets.
(2) Return on stockholders equity.
(3) Debt to assets ratio.

(B) Briefly discuss the operating performance and financial position of Seprator Industry averages for these ratios in 2007were :ROA 3.5% ;return on equity 16%;and debt to assets 75%. Based on this analysis, would you make an investment in the company's 5% convertible bonds? Explain.
(C) Assume you want to compare Sepracor to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value ot the equity component of Sepracor convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Merck?

Solution Preview

Instruction: 
(A)Compute the following ratios for Seprator Inc. ( Assume that year-end balances approximate annual averages) 
(1) Return on assets. 
(2) Return on stockholders equity. 
(3) Debt to assets ratio. 
(B)Briefly discuss the operating performance and financial position of Seprator Industry averages for these ratios in 2007were :ROA 3.5% ;return on equity 16%;and debt to assets 75%. Based on this analysis ,would you make an investment in the company's 5% convertible bonds? ...

Solution Summary

Solution helps in calculating ratios for Seprator Inc. ( Assume that year-end balances approximate annual averages)
(1) Return on assets.
(2) Return on stockholders equity.
(3) Debt to assets ratio.

$2.19