Case 1: Signal cable company
1. Why has the stock price fallen despite the fact that the net income has increased? Ans: The stock price for Signal Cable company could have fallen for a variety of reasons. Stock price is influenced by the performance of the company, investor expectations as well as general market/economic conditions. In the case of Signal, it is clear that the stock price fell despite an increase in the net income. This could be possibly because the company might have made incorrect investment decisions by investing in two manufacturing plants as well tying up more money in inventory.
Shareholders may not be happy with this decision and consequently the demand for the stock may have decreased causing a drop in price. In addition, the dividends offered by the firm has increased in 2004 from 0.187$ per share to 0.214$ per share. Once again, this could be indicative to the market of the company being uncertain of what to do with their resources and not having enough attractive investments to pursue. 2. How liquid would you say that this company is? Calculate the absolute liquidity of the firm. How does it compare with the previous year’s liquidity position? Ans: Short term solvency or the liquidity of a firm can be measured using the liquidity ratios.
This is a measure of short term liquidity helping assess the sufficiency of current assets to meet current liabilities. The ratios include: i) Current Ratio: 2003= 2.50 & 2013= 2.06. The current ratio of the firm has decreased between the last 2 years. This is mainly driven by a huge increase in the inventory held by Signal Cable Company as well as an increase in the accounts receivables. This could be because creditors are not paying on or delays on the banking side. ii) Quick Ratio: 2004= 0.608
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