The December 31, 1995 balance sheet for Spitco, Inc. is presented below.
Spitco, Inc.
Balance Sheet
December 31, 2010
Current assets $40,000
Net fixed assets 20,000
Total $60,000
Accounts payable 11,000
Notes payable 12,000
Total $23,000
Long-term debt (10%) 12,000
Common equity 25,000
Total $60,000
a. Calculate Spitco's current ratio, and net working capital.
b. Spitco feels that its current ratio is too far below the industry average of 2.40. To improve their liquidity, the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable. The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs. The notes payable would remain outstanding through the year. Assume this plan had been implemented for 2010. Calculate what the firm's current ratio, and net working capital would have been.
c. Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?

Question

Quizplus · Accepted Answer

The Answer of The December 31, 1995 balance sheet for Spitco, Inc. is presented below.
Spitco, Inc.
Balance Sheet
December 31, 2010
Current assets $40,000
Net fixed assets 20,000
Total $60,000
Accounts payable 11,000
Notes payable 12,000
Total $23,000
Long-term debt (10%) 12,000
Common equity 25,000
Total $60,000
a. Calculate Spitco's current ratio, and net working capital.
b. Spitco feels that its current ratio is too far below the industry average of 2.40. To improve their liquidity, the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable. The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs. The notes payable would remain outstanding through the year. Assume this plan had been implemented for 2010. Calculate what the firm's current ratio, and net working capital would have been.
c. Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?

The December 31, 1995 Balance Sheet for Spitco, Inc