Why does a higher liability level in a firm make that firm’s common stock a riskier investment?

Question 1: Calculate the current ratio for each firm for fiscal years 2017 and 2018. According to
the current ratio, which firm had the least short term liquidity for each fiscal year? Do the current
ratios for any of the firms concern you? Why or why not?

Question 2: Calculate the quick ratio for each firm for fiscal years 2017 and 2018. Explain the
relation between the current and quick ratios for each company. Which company has the highest
current/quick ratios? Is this unequivocally a good or bad thing? What would you consider if you
were the CFO of that company?
Question 3: Calculate the cash ratio for each firm for fiscal years 2017 and 2018. Which of the
firms is riskiest in terms of short-term liquidity? Is such a small cash ratio necessarily bad for a
firm? Why or why not? Calculate “cash” as the sum of “cash and cash equivalents” and
“marketable securities”.

1 https://www.sec.gov/edgar/searchedgar/companysearch.html
3

Question 4: Calculate the receivables turnover ratio and days’ sales in receivables for each firm
for 2017 and 2018. Interpret each ratio—what does it say on a qualitative level? How do the
differences in business models help explain the differences in these ratios?

Question 5: Calculate the fixed assets to total assets and fixed asset turnover for each firm for
2017 and 2018. What do these ratios say about the differences or similarities between the firms’
businesses?
Question 6: Calculate the total liabilities-to-equity ratio for each firm for 2017 and 2018. Based
solely on these ratios, which of the three firms’ common stocks appears to be the most/least
risky? Why does a higher liability level in a firm make that firm’s common stock a riskier
investment?

Question 7: Calculate the ROE for each firm for 2017 and 2018. Use the DuPont Identity to
understand the factors that contribute to the differences & similarities in ROEs between firms.
Discuss your findings from the DuPont Identity.

Question 8: Calculate the market-to-book ratios for Amazon and Facebook for the end of fiscal
years 2017 and 2018. Do NOT calculate it for Alphabet.
2 You will need: (1) stock prices at the end
of each fiscal year and (2) the weighted average number of shares outstanding for each fiscal
year. You can obtain the historical prices from Yahoo! Finance at finance.yahoo.com—use closing
stock prices (“Close”, not “Adj Close”) in your calculations. The weighted average number of
shares outstanding for each fiscal year is available on the income statement for each company.
Look for the language in the income statements akin to “weighted average shares used in
computation of earnings per share“. Use the basic number of shares reported. How do marketto-book ratios of Amazon and Facebook compare to each other and how have they changed over
time? Explain the dynamics. Is Amazon a value stock or a growth stock on a value-growth
spectrum? Give an example of a non-internet stock on the other end of the value-growth
spectrum and estimate its market-to-book ratio.

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