(a): The answers will be statements “1”, “2” and “4”.
The four companies are in very different industries – one is a software company, one is an automobile company while one is a utility company.
The operating characteristics of firms across different industries vary significantly resulting in very different ratio values – For example usually utility companies carry higher amount of debts than a software company.
Caution must be exercised when comparing older to newer firms, e.g., utility company vs. Software Company this is because of differences in the operating and business metrics in the two cases.
(b): The answers will be statements “3” and “4”.
Electric utility company and fast food company quickly receives payments for their services once bill is raised and so accounts receivable amount is very low in their books.
Moreover they operate mostly on cash basis and all income is received in cash almost instantly on raising the bill and they pay their expenses also without too much delay.
(c ): Here all the statements will be applicable i.e. statements 1,2 , 3 and 4.
Electric utility company has steady and predictable cash inflows in form of regular bill payments. In contrast cash flows of a software company cannot be predicted accurately. Moreover there will be more competing firms in the software industry that will make their cash flows unsteady and hence slightly volatile as well.
(d): The answer will be statements “3” and “4”.
Only by putting money in the software company no benefit of diversification will be achieved.
Although profits are high for the software company so are the risks.
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