Paul Ward is interested in the stock of Pecunious Products, Inc. Before purchasing the stock, Ward...

Question

Paul Ward is interested in the stock of Pecunious Products, Inc. Before purchasing the stock, Ward would like your help in analyzing the data that are available to him as follows: Mr. Ward would like answers to a number of questions about the trend of events in Pecunious Products, Inc., over the last three years. His questions are:

Is it becoming easier for the company to pay its bills as they come due?
Are customers paying their accounts at least as fast now as they were in Year 1?
Is the total of the accounts receivable increasing, decreasing, or remaining constant?
Is the level of inventory increasing, decreasing, or remaining constant?
Is the market price of the company’s stock going up or down?
Is the earnings per share increasing or decreasing?
Is the price-earning ratio going up or down?
Is the company employing financial leverage to the advantage of the common stockholders?
Required:
Answer each of Mr. Ward’s questions and explain how you arrived at youranswers.

David · Accepted Answer

Given Information
Year 1 Year 2 Year 3
100 115 128
2.2 2.3 2.5
1.1 0.9 0.8
12.5 10.6 9.4
8 7.2 6.5
5.80% 6.50% 7.10%
60% 50% 40%
9.50% 11% 12.50%
1.5 1.5 1.5
Is it becoming easier for the company to pay its bills as they come due?
Let us try to do this by creating an example which gives same Current ratio and acid test ratio
Year 1 Year 2 Year 3
Current 
Asset 220 460 750
Current 
Liabilities 100 200 300
Current 
ratio 2.2 2.3 2.5
Liquid 
Assets 110 180 240
Current 
Liabilities 100 200 300
Acid Test 
ratio 1.1 0.9 0.8
It can be seen that Current ratio and Acid test ratio are same in this example as provided in
question. It can be obsereved that Current Ratio is increasing but Quick asset ratio is 
decreasing, this indicates that the company is heavily dependent on inventory and the 
absence of inventory in Quick asset ratio shows true pitcure of liquidity. This is an indication 
that company's liquid assets are not growing as fast as its current liabilities, Thus it is not easy
for the company to pay its bills as they come due.
Are customers paying their accounts at least as fast now as they were in Year 1?
Taking the above example as base, there is increase in Liquid assets for each year,

Paul Ward is interested in the stock of Pecunious Products, Inc. Before purchasing the stock, Ward would like your help in analyzing the data that are available to him as follows: Mr. Ward would like...

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