BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

Tutorial Week 7 – Topic 5

Topic 5
Textbook Chapter 11

Exercise: 11.5

An analyst needs to understand the sources and implications of variability in financial

statement data.

Required:
Identify factors affecting variability in earnings per share, dividends per share, and
market price per share that derive from:

a. The company.
b. The economy.

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BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

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BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

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BBF3034 – Analysis and Valuation of Financial Statements Semester 1 23/24

Problem: 11.3

Aspero, Inc., has sales of approximately $500,000 per year. Aspero requires a short-term
loan of $100,000 to finance its working capital requirements. Two banks are
considering Aspero’s loan request but each bank requires certain minimum conditions
be satisfied. Bank America requires at least a 25% gross margin on sales, and Bank
Boston requires a 2:1 current ratio.
The following information is available for Aspero for the current year:

 Sales returns and allowances are 10% of sales.

 Purchases returns and allowances are 2% of purchases.
 Sales discounts are 2% of sales.
 Purchase discounts are 1% of purchases.
 Ending inventory is $138,000.
 Cash is 10% of accounts receivable.
 Credit terms to Aspero’s customers are 45 days.
 Credit terms Aspero receives from its suppliers are 90 days.
 Purchases for the year are $400,000.
 Ending inventory is 38% greater than beginning inventory.
 Accounts payable are the only current liability.

Required:
Assess whether Aspero, Inc., meets the credit constraint for a loan from either or both
banks. Show computations.

Questions are from Subramanyam, K. R., Financial Statement Analysis, 11th Edition,
McGraw Hill

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