b.
PROBLEM 14.9B
THIS STAR, INC. AND THAT STAR, INC. (concluded
)
Although THAT Star, Inc., has a larger dollar amount of working capital and a higher
current ratio, THIS Star, Inc. has the higher-quality working capital. The quality of working
capital is determined by the nature of the current assets comprising the working capital and
THIS Star is also able to sell its inventory and to collect its receivables more quickly than
THAT Star. THIS Star requires only 26 days to sell its average inventory, while THAT Star
requires 91 days. The overall operating cycle for THIS Star is over two months shorter than
for THAT Star. Thus, THIS Star is able to convert its current assets into cash more quickly
than THAT Star.
25 Minutes, Medium
a.
$1,111 − $550 = 102%
$550
b.
c.
Holcomb computed the 350% increase in fourth-quarter profits by comparing the fourth-
quarter profits of 2015 to those of the third quarter. The computation is:
Holcomb’s conclusion that profits for the “entire year” were up by “over 100%” came from
comparing the total profits of calendar year 2015 to calendar year 2014. The resulting
percentage increase is 102%, computed as follows:
SOLUTIONS TO CRITICAL THINKING CASE
S
HOLIDAY GREETING CARD
S
CASE 14.1
The 350% increase in fourth-quarter profits, developed by comparing fourth-quarter profits
to those of the third quarter, is misleading because of the cyclical nature of Holiday Greeting
Fourth quarter 2014, $500
The appropriate computation of the percentage change in Holiday’s fourth-quarter earnings
for 2015 is a decrease of 10%, computed as follows:
15 Minutes, Easy
Nebraska The
Steak Ranch Stockyards
a. $75,000 $24,000
Current liabilities ……………………………………….. $30,000 $30,000
CASE 14.2
THIRD NEBRASKA BAN
K
Current ratio:
Current assets …………………………………………..
a. (1)
CASE 14.3
NASHVILLE DO-IT-YOURSELF
25 Minutes, Strong
Increase. Paying current liabilities reduces current assets and current liabilities by the
No time estimate, Strong
ETHICS, FRAUD & CORPORATE GOVERNANCE
CASE 14.4
Although there are many possible “solutions” to this case, depending on the companies that
students choose for analysis, students should talk about most of these factors in evaluating the
quality of a company’s board of directors.
Board composition — The board of directors should be comprised of a majority of independent
directors (i.e., an independent director is a director with no ties to the company or its management
other than his or her service as a director). In fact, the NYSE and Nasdaq now require that listed
companies have boards with a majority of independent directors.
Nominating committee — Companies should have a separate committee of the board to handle the
EVALUATING CORPORATE GOVERNANCE QUALITY
CASE 14.4
(concluded)
EVALUATING CORPORATE GOVERNANCE QUALITY
Chairman/CEO Separation — Shareholder activities prefer that the same individual who serves
as CEO also doesn’t serve as chairman of the board of directors (COB). However, in the U.S., the
same individual who serves as CEO also typically serves as COB. As an alternative, a number of
companies appoint a lead director. A lead director leads and is essentially the spokesperson for
the independent members of the board.
Response to Shareholder Proposals — Shareholders are able to put forth proposals for vote at the
annual meeting of shareholders. These shareholders are typically published in the company’s
No time estimate, Strong
CASE 14.5
Student responses will vary, but they should indicate an understanding that companies have
unique operating characteristics, and understanding those before diving into financial
Because students can choose both the company and the ratios they compute, no set answer
can be given for this question. The following are probably the ratios in the categories of
liquidity and profitability that are most likely to be selected by students:
EVALUATING LIQUIDITY AND PROFITABILITY
INTERNET
a.
b.