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Incorporate Finance Hw1

In: Business and Management

Submitted By Sverige
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a) Since suppliers and short-term lenders are most concerned with liquidity ratios in a company, Smith Corporations wins this one. Smith Corporation has a current ratio of 2.5 times compared to Jones’ who is 1.5 times. This can be misleading though since it includes inventory, which cannot be converted into cash fast enough to pay the company’s bills. Smith also has a higher quick ratio (1.5 times) compared to Jones’s who is only 1 time. The quick ratio means that Jones’ can only pay its bills 1 time with their assets that can be quickly converted into cash. Jones Corporation only have 20,000 of cash to pay its accounts payable which is 100,000, while Smith has its cash and marketable securities which totals 42.500 to pay its accounts payable which is 75,000. One could argue that Smith has benefited from having its debt primarily long term rather than short term, but as a credit manager for a supplier, I would still choose Smith Corporation since it seems like they have better liquidity ratios.

b) Stockholders are usually more concerned about profitability, and in this category, Jones Corporation has better ratios than Smith. Since Smith has a larger use of debt, their return on equity is higher than Jones’. The reason why their return on equity is higher than Jones’ is because they have taken more financial risk. Jones has its interest and fixed charges under control and its long-term ratios are better then Smith’s. Jones Corporation have a total asset turnover at 2.5 times compared to Smith Corporation which is a little bit lower at 2.29 times. This means that Jones is more efficient at deploying their assets in generating revenue, which is something that me as an investor would consider important. Jones has higher assets utilization than Smith and the lower liquidity ratios could be a reflection of better short-term asset management. Smith has a high debt to…...

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