Chapter 7, Problem 18PC

When firms enter into loan agreements with their​ bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. ​ So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts​ (AAP) in 2009. The firm had total current assets of $1,907,570,000 and current liabilities of $1,362,550,000.   a.  What is the​ firm's current​ ratio? b.  If the firm were to expand its investment in inventory and finance the expansion by increasing accounts​ payable, how much could it increase its inventory without reducing the current ratio below 1.2​? c.  If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and​ short-term debt, how much would it have to reduce current assets to accomplish this​ goal?       Question content area bottom Part 1 a.  What is the​ firm's…

Copy Corporation entered into a lease agreement for 25 photocopy machines for its corporate headquarters.  The lease agreement qualifies as an operating lease in all ways except that there is a bargain purchase option.  After the four-year lease term, the corporation can purchase each copier for $1,200, when the anticipated market value of each machine will be $3,600. Glenn Beckirtt, one of the chief accountants, thinks the financial statements must recognize the lease agreement as a finance (capital) lease because of the bargain purchase clause.  One of the head accountants, Tara Kobban, disagrees: “Although I don’t know much about the copiers themselves, there is a way to avoid recording the lease liability.”  She argues that the corporation might claim that copier technology advances rapidly and that by the end of the lease term – four years in the future – the machines will most likely not be worth the $1,200 bargain price.   Required: Following the case format, please address 3…

When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm has total current assets of $1,780,195,300 and current liabilities of $1,369,381,000. What is the firm’s current ratio? If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal?

DIRECTIONS: Read and analyze the following problems and supply what is required and support it with necessary computations. ABS CBN Company thinks of acquiring a fixed asset that will improve the production capacity of the business. To finance the acquisition, IZZY plans to issue 7.8%, P1,000 face value bonds amounting to P450,000,000. The company has issued its old bonds at face value, and expects to sell the new issuance based on the P 1,000 face value. IZZY is subject to a 3 coincome tax rate. Required: Compute the cost of debt issuance.

A car manufacturer has a car with a carrying value of €18,000 on their balance sheet.  The manufacturer enters into a car lease agreement with a customer over a four year period.  The customer will pay €6,000 per year and the least interest rate is 4%.   Show how the manufacturer will account for this agreement and the effect on the balance sheet, income statement and cash flow over the lease period.       Show how this lease agreement would be accounted for by the manufacturer if significant risks of ownership had not been transferred to lessee.      Explain the reasons a company may prefer to lease an asset rather than purchase.

please help me answeer the following given  Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $3,780,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industr, averages and Creek's recent financial statements, evaluate and recommend appropriate action on the loan request. Industry averages Creek Enterprises Income Statement:  Debt ratio            0 50 Times interest earned ratio  7.42 Fixed-payment coverage ratio 2.03   Creek Enterprises Balance Sheet:  Creek Enterprises's debt ratio is _____ (Round to two decimal places.) Creek Enterprises's times interest earned ratio is ______ (Round to two decimal places.) Creek Enterprises's fixed-payment coverage ratio is. ______ (Round to two decimal places.) Complete the following summary of ratios and compare Creek Enterprises's ratios vs. the industry average: (Round to two decimal places.) Creek Debt ratio Industry 0.50 Times…

JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 23​% tax​ bracket, and its​ after-tax cost of debt is currently 9​%. The terms of the lease and of the purchase are as​ follows:   Lease: Annual​ end-of-year lease payments of ​$30,000 are required over the​ three-year life of the lease. All maintenance costs will be paid by the​ lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for ​$6,500 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option.   Purchase: The equipment costs ​$70,000 and can be financed with a 15​% loan requiring annual​ end-of-year payments of ​$30,658 for three years. JLB will depreciate the equipment under MACRS using a​ three-year recovery period.  ((See TABLE below) for the applicable depreciation​ percentages.) JLB will pay ​$2,600 per year…

JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 27​% tax​ bracket, and its​ after-tax cost of debt is currently 9​%. The terms of the lease and of the purchase are as​ follows:   Lease: Annual​ end-of-year lease payments of ​$30,000 are required over the​ three-year life of the lease. All maintenance costs will be paid by the​ lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $3,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option.   Purchase: The equipment costs ​$70,000 and can be financed with a 14​% loan requiring annual​ end-of-year payments of ​$30,151 for three years. JLB will depreciate the equipment under MACRS using a​ three-year recovery period. JLB will pay ​$2,200 per year for a service contract that covers all maintenance​ costs;…

A corporation is attempting to determine whether it should lease or purchase equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: Lease there will be annual end-of-year lease payments of $25,200 each year over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will be able to exercise its option to purchase the asset for $5,000 at termination of the lease. Purchase The equipment which costs $60,000 can be financed completely with a 14% loan that requires annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm.…