Chapter 2, Problem 2.2BYP

(a)

To determine

Working capital: This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted.

Formula of working capital:

$\text{Working capital}=\text{Current assets}+\text{Current liabilities}$

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}$

Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.

Formula of debt to assets ratio:

$\text{Debt to assets ratio}=\frac{\text{Total liabilities}}{\text{Total assets }}$

Free cash flow: This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends.

Formula of free cash flow:

$\text{Free cash flow}=\left\{\begin{array}{l}\text{Net cash provided by operating activities}-\\ \text{Capital expenditures}-\\ \text{Dividends}\end{array}\right\}$

Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Formula of EPS:

$\text{EPS}=\frac{\text{Net income}-\text{Preferred dividends}}{\text{Weighted average common shares outstanding}}$

To compute: (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Company H and Company T for 2011

(b)

To determine

To analyze: The liquidity and solvency position of two companies based on the computed ratios