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Financial Statement Analysis - Assignment Example

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Multiple choices 1. d. Gap because its accounts payable turnover is lower and its accounts payable days outstanding is higher. 2. c. For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount…
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Download file to see previous pages A provision for warranty should be provided for at 2% and any changes is taken to the profit and loss account. An account should be maintained that has this figures and if there is returns then the actual amount and changes in the provision is taken to the profit and loss account. b. Calculate K2’s warranty expense for 2008. Opening balance 8,430,000 Provision 2% of 1,934,700,000 38, 694,000 47, 124,000 Closing balance 6,490,000 Warranty expense for the period 40,634,000 c. How much did K2 pay during the year to repair and or replace goods under warranty? Amount paid for repairs =50% of warranty Amount paid for repairs =50% of 2% of 1934.7million = 19,347,000 2. (6 points) Mustang Inc. issued $800,000 of 5%, 20-year bonds at 96 on January 1, 2000. Through Jan 1, 2008, Mustang amortized $20,000 of the bond discount. On January 1, 2008, Mustang Inc. retired the bonds at 102 (after making the interest payment on that date). a. Calculate the net book value of the bond on January 1, 2008 Interest = .05 x800,000= 40,000 Net book value = 800,000x102/100 = 816,000 b. and the gain or loss that Mustang would report for this retirement. Loss of the retirement = 800,000-816,000= 16,000 3. Higher Ratio financial risk Total debt/ equity (%) Increases EBITDA interest coverage Decreases Operating income/Sales (%) Decreases Free operating cash flow/Total debt (%) Decreases Return on equity (%) Decreases FFO/Total debt (%) Increases / Decreases Long-term debt/ equity (%) Increases EBIT interest coverage Decreases 4. (18 points) Progressive Corporation (a property and casualty insurance company) reported the following in its 2008 annual report: 2008 2007 (in millions) Carrying Value Fair Value Carrying Value Fair Value 6.375% Senior Notes due 2012 (issued: $350.0, December 2001) $ 348.9 $ 355.3 $ 348.6 $ 367.8 7% Notes due 2013 (issued: $150.0, October 1993) 149.3 154.3 149.2 162.9 6 5?8% Senior Notes due 2029 (issued: $300.0, March 1999) 294.6 272.0 294.4 311.8 6.25% Senior Notes due 2032 (issued: $400.0, November 2002) 394.0 350.0 393.9 397.6 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (issued: $1,000.0, June 2007 988.7 450.0 987.8 936.5 $2,175.5 $1,581.6 $2,173.9 $2,176.6 On December 31, 2008, we entered into a 364-Day Secured Liquidity Credit Facility Agreement with National City Bank (NCB). Under this agreement, we may borrow up to $125 million, which may be increased to $150 million at our request but subject to NCB’s discretion. The purpose of the credit facility is to provide liquidity in the event of disruptions in our cash management operations, such as disruptions in the financial markets, that affect our ability to transfer or receive funds. The revolving credit facility agreement discussed above replaced an uncommitted line of credit with NCB in the principal amount of $125 million. Under this terminated agreement, no commitment fees were required to be paid and there were no rating triggers. Interest on amounts borrowed would have generally accrued at the one-month LIBOR plus .375%. We had no borrowings under this arrangement during 2008, 2007, or 2006. Aggregate principal payments on debt outstanding at December 31, 2008, are $0 for 2009, 2010, and 2011, $350.0 million for 2012, $150.0 million for 2013, and $1.7 billion thereafter. Required: a. What amount does Progressive report for long-term debt on its balance sheet? The amount of long-term debt reported in the year 2008 was 2,175.5 million and 2,173.9million in the year 2007 b. Why is ...Download file to see next pagesRead More
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