8. Your financial analyst calculated the following ratios for three companies: B
ID: 2810051 • Letter: 8
Question
8. Your financial analyst calculated the following ratios for three companies: Boeing Microsoft PG&E Cash ratio 0.15 0.1 Current ratio 1.3 2.5 Debt ratio 0.9 0.4 Profit margin | 5% | 28% a. Evaluate the statement Microsoft is a better company than Boeing and PG&E because of its 0.1 0.8 0.75 6% higher current ratio." O No: Current assets typically deliver lower returns so tying up too much money in current assets yields low retums Yes: A higher current ratio means that the company is in a better position to pay off ts current iabilities O Yes: A higher current ratio means that the company has more current assets O No: The current ratios are not directly comparable, since each company is in a different industry b. What is the most likely reason that Boeing and PG&E have a higher debt ratio than Microsot? OBoeing and PG&E own a lot of tangible fixed assets which make it easier to borrow money cheaply Boeing and PG&E have more stable cash flows than Microsoft and are thus better suited for debt financing O Boeing and PG&E have lower current ratios than Microsoft. O Microsoft is so profitable that it does not have to borrow much money. c. Which is the best company for a stockmarket investor? O Boeing O Cannot tell O Microsoft o PG&EExplanation / Answer
a. The correct answer is the fourth option i.e. No. The current ratios are not comparable, since each company is in a different industry. The current assets and current liabilities of the companies will be different as they belong to different sectors. Hence, the current ratio is not comparable.
b. The correct answer is the first option i.e. Boeing and PG&E have more tangible assets than Microsoft and so they get debt cheaply. As the tangible assets are more so the debt requirement will be more and the banks will also be willing to give debts in return for the company's tangible asset as security.
c. The correct answer is the 2nd option i.e. cannot tell. The stockmarket investor should analyse other aspects of the company to invest in it.
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