Problem 1. Under what circumstances might a company have a high p/e ratio even when investors are not optimistic about the company's future prospects?
Problem 2. Assume that you have several thousand dollars to invest in the stock market. Given that "people will always have to eat," you have decided to explore the possibility of investing in Wendy's and McDonald's. Your analysis of each company's financial statements reveals that both have negative working capital and both have current and quick ratios of less than 1 to 1. Assume that neither Wendy's or McDonald's accepts debit or credit cards. Based on your findings, should you be concerned about the short-term liquidity (solvency) of these two companies? Explain.
Problem 3. Assume that the net sales of a large department store have grown annually at a rate of 5% over each of the past several years. Do you think that the store is selling 5% more merchandise each year? Explain in detail.
Problem 4. Net sales at the General Store have been increasing at a reasonable rate, but net income has been declining steadily as a percentage of sales. What seems to be the problem?
Problem 5. Alpine Products experiences a considerable season variance in its business. The high point in the year's activity comes in November, the low point in July. During which month would you expect the company's current ratio to be higher? If the company were choosing a fiscal year for accounting purposes, what advice would you give?
Problem 6. Top Drawer Inc. reported 2006 earnings per share of $3.26 and had no extraordinary items. In 2007 earnings per share on income before extraordinary items was $2.99, and earnings per share on net income was $3.49. Do you consider this trend to be favorable? Why or why not?
Problem 7. Assume that you are a financial analyst and that two of your clients are requesting your advice on certain companies as potential investments. Both clients are interested in purchasing common stock. One is primarily interested in the dividends to be received from the investment. The second is primarily interested in the growth of the market value of the stock. What information would you advise your clients to focus on in their respective analyses?