82 PART 1 Introduction to Managerial Finance
LG3LG3a. What problems might Robert encounter in comparing these companies to
one another on the basis of their ratios?
b. Why might the current and quick ratios for the electric utility and the
fast-food stock be so much lower than the same ratios for the other
companies?
c. Why might it be all right for the electric utility to carry a large amount of
debt, but not the software company?
d. Why wouldn’t investors invest all of their money in software companies
instead of in less profitable companies? (Focus on risk and return.)2–11 Liquidity management Bauman Company’s total current assets, total current
liabilities, and inventory for each of the past 4 years follow:a. Calculate the firm’s current and quick ratios for each year. Compare the
resulting time series for these measures of liquidity.
b. Comment on the firm’s liquidity over the 2000–2003 period.
c. If you were told that Bauman Company’s inventory turnover for each
year in the 2000–2003 period and the industry averages were as follows,
would this information support or conflict with your evaluation in part b?
Why?2–12 Inventory management Wilkins Manufacturing has sales of $4 million and a
gross profit margin of 40%. Its end-of-quarter inventoriesarea. Find the average quarterly inventory and use it to calculate the firm’s inven-
tory turnover and the average age of inventory.
b. Assuming that the company is in an industry with an average inventory
turnover of 2.0, how would you evaluate the activity of Wilkins’ inventory?Quarter Inventory1 $ 400,000
2 800,000
3 1,200,000
4 200,000Inventory turnover 2000 2001 2002 2003Bauman Company 6.3 6.8 7.0 6.4
Industry average 10.6 11.2 10.8 11.0Item 2000 2001 2002 2003Total current assets $16,950 $21,900 $22,500 $27,000
Total current liabilities 9,000 12,600 12,600 17,400
Inventory 6,000 6,900 6,900 7,200