EXERCISE 2-7
(a)
Working capital
Current ratio
Beginning of Year
End of Year
$1,813 – $951 = $862
$2,054 – $948 = $1,106
$1,813
= 1.91:1
$951
$2,054
= 2.17:1
$948
(b) Nordstrom’s liquidity improved during the year. Its current ratio
increased from 1.91:1 to 2.17:1. Also, Nordstrom’s working
capital increased by $244,000,000.
(c) Nordstrom’s current ratio at both the beginning and the end of the
recent year exceeds Best Buy’s current ratio for 2001 (and 2000).
Nordstrom’s end-of-year current ratio (2.17) exceeds Best Buy’s
2001 current ratio (1.08). Nordstrom would be considered more
liquid than Best Buy for the recent year.
EXERCISE 2-8
2002
(a)
Debt to assets ratio
(b)
Cash debt coverage
ratio
$198,402
$599,120
= 33.1%
$73,505
= .38
($198,402  $193,441)
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2001
$193,441
$507,629
= 38.1%
$60,564
= .34
($193,441  $160,000)
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EXERCISE 2-8 (Continued)
(c) Lands’ End, Inc.’s debt to total assets ratio decreased from 38%
for 2001 to 33% for 2002 indicating greater solvency for 2002. Its
cash debt coverage ratio also improved from .34 to .38. Lands’
End, Inc.’s solvency appears to be improving.
(d)In both 2002 and 2001 Lands’ End, Inc.’s cash provided by
operating activities was greater than the cash used in investing
activities. Lands’ End, Inc. is generating plenty of cash from
operations to cover its investing needs. This is not unusual for a
company that has been operating successfully for several
decades, as has been the case with Lands’ End, Inc. If it faced a
deficiency, it could meet it by issuing stock or debt.
PROBLEM 2-6A
(a) Current ratio =
$319,100
= 2.0:1.
$158,200
(b) Working capital = $319,100 – $158,200 = $160,900.
(c) Current cash debt coverage ratio =
$82,300
= .52
 $158,200  $156,000 


2
times.
(d) Debt to total assets ratio =
(e) Cash debt coverage ratio =
$290,200
= 37%.
$784,400
$82,300
= .29 times.
 $290,200  $276,000 


2
2
(f)
Earnings per share =
(g) Price-earnings ratio =
$108,200
= $1.55.
70,000
$ 34
= 21.94
$1.55
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PROBLEM 2-7A
2003
2004
(a) Earnings per share.
$163,000
= $.51
320,000 shares
$85,000
= $.23
370,000 shares
(b) Price-earnings ratio.
$ 10
= 19.61
$0.51
$ 4
= 17.39
$0.23
(c) Working capital.
($24,000 + $65,000 + $75,000) –
$75,000 = $89,000
($50,000 + $90,000 + $80,000) –
$98,000 = $122,000
(d) Current ratio.
$164,000
= 2.19:1
$75,000
$220,000
= 2.24:1
$98,000
(e) Debt to total assets.
$145,000
= 22.3%
$649,000
(f)
$195,000
= 23.1%
$844,000
The underlying profitability of the corporation has declined. For
example, the earnings per share and price-earnings ratio have
both declined. The liquidity of the corporation improved as
shown by the increase in working capital and the current ratio.
Also, the corporation appears to be increasing its debt burden as
its debt to total assets increased slightly.
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PROBLEM 2-8A
Ratio
Bethlehem Steel
United States Steel
(All Dollars Are in Millions)
(a)
Working capital
$931 ($1,203 – $272)
$814 ($2,073 – $1,259)
(b)
Current ratio
4.4:1 ($1,203 ÷ $272)
1.6:1 ($2,073 ÷ $1,259)
(c)
Debt to total assets ratio
139.6% ($5,925 ÷ $4,244)
69.9% ($5,831 ÷ $8,337)
(d)
Earnings (Loss) per share
($15.27) =
($1,950)  40.5
130.33
($2.45) =
($218)  0
88.99
(e) Price-earnings ratio – Can not be determined since earnings per
share is negative.
(f)
The comparison of the two companies shows the following:
Liquidity—Bethlehem Steel’s current ratio is 4.4:1 compared to
United States Steel’s 1.6:1. Its working capital is $931 compared
to United States $814. Bethlehem Steel is more liquid than United
States Steel using either indicator.
Solvency—United States Steel is more solvent than Bethlehem
Steel because its ratio of debt to total assets is significantly
lower.
Profitability—The profit picture is bleak for both. Each company
reported losses in 2001. Bethlehem Steel’s was almost 9 times
larger than United States Steel’s. The negative stockholders’
equity on Bethlehem Steel’s balance sheet indicates that it has
experienced losses in the past that exceeded its cumulative
earnings.
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PROBLEM 2-6B
(a) Working capital = $446,900 – $243,500 = $203,400.
(b) Current ratio =
$446,900
= 1.8:1.
$243,500
(c) Current cash debt coverage ratio =
$190,800
 $243,500  $107,400 


2
= 1.1
times.
(d) Debt to total assets ratio =
(e) Cash debt coverage ratio =
(f)
Earnings per share =
(g) Price-earnings ratio =
$453,500
= 42.3%.
$1,072,200
$190,800
= .50 times.
 $453,500  $307,400 


2
$118,100
= $2.36.
50,000 shares
$30
= 12.71.
$2.36
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PROBLEM 2-7B
2003
(a) Earnings per share.
$40,000
= $1.33
30,000 shares
2004
$90,000
= $2.81
32,000 shares
(b) Price-earnings ratio.
$40
= 30.1 times
$1.33
$60
= 21.4 times
$2.81
(c) Working capital.
($20,000 + $65,000 + $70,000) –
$80,000 = $75,000
($25,000 + $70,000 + $90,000) –
$75,000 = $110,000
(d) Current ratio.
$155,000
= 1.9:1
$80,000
$185,000
= 2.5:1
$75,000
(e) Debt to total assets.
$165,000
= 24.1%
$685,000
(f)
$155,000
= 20.4%
$760,000
The underlying profitability of the corporation has improved. For
example, the net income and earnings per share improved. The
liquidity of the corporation has also improved as shown by the
increase in working capital and the current ratio. Also, the
corporation reduced its debt burden since its debt to total assets
decreased.
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PROBLEM 2-8B
Ratio
Target
Wal-Mart
(All Dollars Are in Millions)
(a)
Working capital
$7,304 – $6,301 = $1,003
$26,555 – $28,949 = ($2,394)
(b)
Current ratio
1.2:1 ($7,304 ÷ $6,301)
.92:1 ($26,555 ÷ $28,949)
(c)
Debt to total assets ratio
66.6% ($12,971 ÷ $19,490)
59.9% ($46,787 ÷ $78,130)
(d)
Earnings per share
$1.40 =
$1,264
$1.41 =
4,465
904
(e)
Price–earnings ratio
26.4 =
$36.97
$1.40
(f)
$6,295
40.3 =
$56.80
$1.41
The comparison of the two companies shows the following:
Liquidity—Target’s current ratio of 1.2:1 is better than Wal-Mart’s
.92:1 and Target has significantly higher working capital than
Wal-Mart.
Solvency—Wal-Mart’s debt to total assets ratio is about 10% less
than Target’s.
Profitability—Earnings per share should not be compared across
companies. Investors feel much more positive about Wal-Mart’s
future profitability as indicated by a P-E ratio of 40 compared to
26 for Target.
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