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Operating performance and financial position

Assignment:

Sepracor Inc, a drug company reported the following information. The company prepares the financial statement in accordance with GAAP.

Current Liabilities.....................................$554,114

Convertible subordinated debt...................648,020

Total liabilities..........................................1,228,313

Stockholders equity...................................176.413

Net income...................................................58,333

Analysis attempting to compare Seprator to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.

Instruction:

(A) Compute the following ratios for Seprator Inc. ( Assume that year-end balances approximate annual averages)

(1) Return on assets.

(2) Return on stockholders equity.

(3) Debt to assets ratio.

(B) Briefly discuss the operating performance and financial position of Seprator Industry averages for these ratios in 2007were :ROA 3.5% ; return on equity 16%;and debt to assets 75%. Based on this analysis, would you make an investment in the company's 5% convertible bonds? Explain.

(C) Assume you want to compare Sepracor to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value ot the equity component of Sepracor convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Merck?

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