Generally Accepted Accounting Principles and Stockholders Equity

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1). Return on assets.
Net income58,333
Total assets (Total liabilities + Stockholders equity)1,404,726 Return on assets4.2% =net income/1,404,726

2). Return on stockholders’ equity
Net income58,333
Stockholders equity176,413
Return on equity33.1%

3). Debt to asset ratio
Debt 648,020
Total assets1,404,726
Debt to assets ratio is equal to46% debt/total assets

A). Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007 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.

Sepracor Industry
ROA 4.2% 3.50%
Return on equity33.1% 16%
Debt to assets46% 75%

From the information acquire above, one can see that Sepracor has done better than its industry standard. Its ROA ,return on equity were higher the industry standard. In addition, the debt to assets ratio was lower than the industry. With all these parameters available, I would therefore recommend to invest in this company.

B) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor’s convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer?

It is my understanding that IAS 32 rules for convertible bonds would be reevaluated as part of equity, since all previous ratios calculated would not change except for the return on equity. In addition, once the convertible bonds are included in the equity the return on equity would decrease

Net income 58,333
Stockholders equity326,413
Return on equity 17.9%

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