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					EXERCISE 2-7

(a)                             Beginning of Year                 End of Year
      Working capital          $1,813 – $951 = $862         $2,054 – $948 = $1,106
                                  $1,813                        $2,054
      Current ratio                      = 1.91:1                      = 2.17:1
                                   $951                          $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                             2001

                             $198,402                      $193,441
(a)   Debt to assets ratio              = 33.1%                       = 38.1%
                             $599,120                      $507,629

                                    $73,505                       $60,564
(b)   Cash debt coverage                           = .38                         = .34
                             ($198,402  $193,441)         ($193,441  $160,000)
      ratio
                                        2                             2




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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


                      $319,100
(a) Current ratio =            = 2.0:1.
                      $158,200


(b) Working capital = $319,100 – $158,200 = $160,900.


                                                  $82,300
(c) Current cash debt coverage ratio =                            = .52
                                           $158,200  $156,000 
                                          
                                                    2          
                                                                
times.

                                   $290,200
(d) Debt to total assets ratio =            = 37%.
                                   $784,400


                                           $82,300
(e) Cash debt coverage ratio =                             = .29 times.
                                    $290,200  $276,000 
                                   
                                             2          
                                                         


                                                                          2
                             $108,200
(f)   Earnings per share =            = $1.55.
                              70,000

                             $ 34
(g) Price-earnings ratio =         = 21.94
                             $1.55




                                                 3
                              PROBLEM 2-7A


                      2003                               2004

(a) Earnings per share.
         $163,000                             $85,000
                     = $.51                               = $.23
      320,000 shares                       370,000 shares

(b) Price-earnings ratio.
      $ 10                                  $ 4
            = 19.61                               = 17.39
      $0.51                                 $0.23

(c) Working capital.
      ($24,000 + $65,000 + $75,000) –      ($50,000 + $90,000 + $80,000) –
        $75,000 = $89,000                    $98,000 = $122,000

(d) Current ratio.
      $164,000                              $220,000
               = 2.19:1                              = 2.24:1
       $75,000                               $98,000

(e) Debt to total assets.
      $145,000                              $195,000
               = 22.3%                               = 23.1%
      $649,000                              $844,000

(f)   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.




                                                                      4
                                   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                 ($1,950)  40.5               ($218)  0
                                   ($15.27) =                     ($2.45) =
                                                    130.33                      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.




                                                                                           5
                             PROBLEM 2-6B


(a) Working capital = $446,900 – $243,500 = $203,400.


                      $446,900
(b) Current ratio =            = 1.8:1.
                      $243,500


                                                 $190,800
(c) Current cash debt coverage ratio =                              = 1.1
                                           $243,500  $107,400 
                                          
                                                    2          
                                                                
times.


                                    $453,500
(d) Debt to total assets ratio =              = 42.3%.
                                   $1,072,200


                                           $190,800
(e) Cash debt coverage ratio =                             = .50 times.
                                    $453,500  $307,400 
                                   
                                             2          
                                                         


                               $118,100
(f)   Earnings per share =                 = $2.36.
                             50,000 shares


                              $30
(g) Price-earnings ratio =         = 12.71.
                             $2.36




                                                                            6
                              PROBLEM 2-7B

                 2003                                     2004
(a) Earnings per share.
         $40,000                               $90,000
                    = $1.33                               = $2.81
      30,000 shares                         32,000 shares

(b) Price-earnings ratio.
       $40                                    $60
            = 30.1 times                           = 21.4 times
      $1.33                                  $2.81

(c) Working capital.
      ($20,000 + $65,000 + $70,000) –       ($25,000 + $70,000 + $90,000) –
        $80,000 = $75,000                     $75,000 = $110,000

(d) Current ratio.
      $155,000                               $185,000
               = 1.9:1                                = 2.5:1
       $80,000                                $75,000

(e) Debt to total assets.
      $165,000                               $155,000
               = 24.1%                                = 20.4%
      $685,000                               $760,000

(f)   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.




                                                                       7
                                   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)

                                             $1,264                            $6,295
(d)   Earnings per share           $1.40 =                           $1.41 =
                                              904                               4,465

                                            $36.97                            $56.80
(e)   Price–earnings ratio         26.4 =                            40.3 =
                                             $1.40                             $1.41


(f)   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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