Problem
The following table presents the financial information of a software company 'DeskPro' in 2020:
|
Items
|
Value
|
|
Accounts payable
|
440000
|
|
Accounts receivable
|
160000
|
|
Cash and equivalents
|
141000
|
|
Common stock
|
340000
|
|
Inventories
|
310000
|
|
Long-term debt
|
440000
|
|
Patents and intangibles
|
150000
|
|
Preferred stock
|
50000
|
|
Property, plant, and equipment
|
689000
|
|
Retained earnings
|
60000
|
|
Short-term debt
|
120000
|
1. Construct DeskPro's balance sheet for the year 2020.
2. The company's sales (all sales are credit sales) and cost of sales for the year 2020 are $1,900,000 and $1,400,000, respectively. Calculate cash conversion cycle of the company and interpret the result.
3. Due to a violation of the debt covenants, DeskPro is obligated to pay its creditors all its liabilities very soon. What is the market value of the shareholders' equity if the company's total assets have a market value of $2,500,000? What if the market value of total assets equals $1,250,000? Can market value of equity be negative and why?
4. If you observe a drop in ROA of the company, does it necessarily mean a deterioration in the company's financial health? Explain why.