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Accounting - Essay Example

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Because the after-tax interest of bonds is 5.6%. The company’s return on total assets after tax is 7.625% according to section A. We can easily get the rate of return on total assets exceeding the rate of return that the company’s creditors…
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Download file to see previous pages that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts after all the creditors were paid off. Book value per share is based entirely on historical costs.
The bank should not approve a five-year $500,000 loan to Stephens Company due to the times interest earned and debt-equity ratios. Stephens Company’s times interest earned ratio is 3.5, lower than Stephen’s industry (5). Also, the debt-to-equity ratio is 1.036, greater than 0.8 (industry ratio). Both of these figures show that the company earnings are lower than competitors and also that the company relies too much on loans or debt. The current ratio is higher than competitors and the acid-test ratio is lower than the industry average. Most of the current assets are inventory and prepaid expenses, which cannot be converted to money quickly. The gross margin is lower than the industry average and the ability of company to generate profit is low. This company does not have good prospects the long ...Download file to see next pagesRead More
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