# Calculating ratios: capitalization

As far as non banking corporations are concerned following ratios determine the corporation to be adequately capitalized or undercapitalized:

(i) Working capital to total asset ratio

(ii) Retained earnings to total asset ratio

(iii) EBIT to total sales ratio

(iv) Market value of equity to book value of liabilities

(v) Sales by total asset

(vi) Time interest earned ratio

Altman Z score is used to find whether a corporation is adequately capitalized or undercapitalized. Altman z-score uses working capital to total asset ratio, retained earnings to total asset ratio, EBIT to total sales ratio, market value of equity to market value of liability ratio, and sales by total asset ratio to determine whether the corporation is well capitalized or undercapitalized. If Altman z score is between 1.81 to 2.99 the corporation is assumed to be adequately capitalized. If the score is more than 2.99 the corporation is assumed to be undercapitalized.

Times interest earned ratio helps to find out whether the corporation is capable enough to repay its interest also helps to find out whether the corporation is adequately capitalized or undercapitalized.

Please calculate the above ratios using the attached PDF document.

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#### Solution Preview

Please see the attached MS Word document for the solutions to the questions asked. Included are the formulas for calculating the listed ratios.

Thank you for using BrainMass.

Answer:

Altman Z score:

Working capital to Total Asset Ratio:

Working capital to total asset ratio=(Current Asset-Current ...

#### Solution Summary

Capitalization for calculating ratios are analyzed. The time interest earned ratios are provided.

Use table below for figuring free cash flows of acquisition target organization.

1) Use table below for figuring free cash flows of acquisition target organization. Free cash flows include forecasted synergies.

Buyer has WACC 20%

What is the value of the acquisition target? Please show calculations.

Free Cash Flow

Year 1 $99,000

Year 2 102,000

Year 3 170,000

Year 4 150,000

Year 5 100,000

2)Use table below to figure.

Assume merger gains $25,000,000

Combined company=30 million shares @ $100/share

Combined company after the merge P/E ratio? Please show calculations.

($ in millions, except per share) Buyer Seller

Price-Earnings Ratio (P/E) 20 12

Shares Outstanding 20 20

Price per Share $100.00 $45.00

3) Variables involved in this free cash flow problem:

Forecast for an organization is to generate EBIT of $500,000 over 5 years.

Depreciation is forecasted to be $150,000 /year

Corporate tax rate 40%

Net working capital increase in year one of $50,000

Decrease in year 5 of $25,000

Figure the free cash flow from the project in year one. Please show all calculations.

4) Use table below to figure working capital:

a)During the year what was change in working capital?

b) sales= $52,000

costs=$39,000

depreciation 0%

Taxes 0%

Figure cash flow. Please show calculations.

Beginning End of Year

Current Assets

Accounts Receivable $24,000 $23,000

Prepaid Expenses 5,000 6,000

Inventory 12,000 12,500

Fixed Assets 100,000 99,000

Current Liabilities

Accounts Payable 14,500 16,500

Accrued Liabilities 7,500 6,500