Essay Finance

Words: 970
Pages: 4

1. Why has the stock price fallen despite the fact that net income has increased over the periods under review?

The stock price has fallen because the shareholders were worried about increasing debts and liabilities, that adding two manufacturing factories created and because of how much excesses inventory was created. Both of these changes would result in interest change of 44,000 to 155,000 that the company would have to pay, that impact on the company’s future earnings hurts the company’s image to stockholders causing them to worry.

2. Tabulate your results and briefly comment on the liquidity position of the company between the two periods.

Absolute Liquidity
5/895 = 0.005:1
= 40/355 = 0.11:1
…show more content…
Lastly the free cash flow to stockholders, this is also negative due to the fact that there is a lot of new equity from retained earnings.

6. Calculate the net working capital of the company relative to sales for each of the two years.
What can you conclude about the firm's net working capital position between the two periods?

Net Working Capital = Current Assets - Current Liabilities 2003: NWC = $890,000 - $355,000 = $535,000
2004: NWC = $1,845,450 - $895,000 = $950,450

The networking capital has increased significantly from $ 535,000 in 2003 to $ 950,450 in 2004. This leads to the assumption that the assets must have been growing with a higher rate than the liabilities. Therefore, it can be concluded that the new assets were mostly financed with long-term debt.
As seen in question 2, the growth of the networking capital has a negative impact on the company’s liquidity, because networking capital locks up money.

7. Should the shareholders be concerned about the drop in cash flow, why and why not? Should they be happy with the increase in earnings per share? Explain.

To answer this question the long- and short-term should be considered. In the short term the shareholders should be concerned about the solvency (illiquidity) of the Signal Cable Company and should monitor the development of the cash balance and further financial transactions of the company. Another