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Question
The December 31, 1995 balance sheet for Spitco, Inc. is presented below.| Spitco, Inc. | |
| Balance Sheet | |
| 31-Dec-10 | |
| Current assets | $40,000 |
| Net fixed assets | 20,000 |
| Total | $60,000 |
| Accounts payable | 11,000 |
| Notes payable | 12,000 |
| Total | $23,000 |
| Long-term debt (10%) | 12,000 |
| Common equity | 25,000 |
| Total | $60,000 |
b. Spitco feels that its current ratio is too far below the industry average of 2.40. To improve their liquidity, the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable. The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs. The notes payable would remain outstanding through the year. Assume this plan had been implemented for 2010. Calculate what the firm's current ratio, and net working capital would have been.
c. Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?
Answer
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