Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance

Question:

Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance with GAAP.

                                                                                2020 (,000)
Current liabilities...................................................$ 554,114
Convertible subordinated debt..............................648,020
Total liabilities........................................................1,228,313
Stockholders’ equity.................................................176,413
Net income..................................................................58,333

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


Instructions

a. Compute the following ratios for Ragatz, Inc. (Assume that year-end balances approximate annual averages.)

1. Return on assets.

2. Return on common stock equity.

3. Debt to assets ratio.

b. Briefly discuss the operating performance and financial position of Ragatz. Industry averages for these ratios in 2020 were 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 Ragatz to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value of the equity component of Ragatz’s convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Ragatz and Merck?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Related Book For  book-img-for-question

Intermediate Accounting

ISBN: 978-1119503668

17th edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfiel

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