Critical Thinking Skills Assignment

Evaluation skill: Evaluation is associated with the ability to judge the value of material for a given purpose. The judgements are to be based on definite criteria. These criteria may be determined by relevance, purpose, statements, and numerical values or calculations. Please watch the video clips provided on Evaluating Logic Part 1,2 and 3

Read the following vignette carefully and answer questions using the evaluation skill.

Emily Smith just received a promotion at work that increased her annual salary to $42,000. She is eligible to participate in her employer’s 401(k) retirement plan to which the employer matches, dollar for dollar, workers’ contributions up to 5% of salary. However, Emily wants to buy a new

$25,000 car in 3 years, and she wants to have enough money to make a $10,000 down payment on the car and finance the balance. Fortunately, she expects a sizable bonus this year that she hopes will cover that down payment in 3 years.

A wedding is also in her plans. Emily and her boyfriend, Paul, have set a wedding date two years in the future, after he finishes medical school. In addition, Emily and Paul want to buy a home of their own in 5 years. This might be possible because two years later, Emily will be eligible to access a trust fund left to her as an inheritance by her late grandfather. Her trust fund has $80,000 invested at an interest rate of 5%.

Justify Emily’s participation in her employer’s 401(k) plan using the time value of money concepts by calculating the actual annual return on her own contributions. She will contribute $1,000 per year to her 401(k) for 25 years and the employer will match dollar for dollar. Assume that her 401(k) earns 6% per year for 25 years and all contributions are made at the end of each year.

Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 4% on her What if she could earn 10% on her savings?

What will be the value of Emily’s trust fund in 36 years, assuming she takes possession of $20,000 in 2 years for her wedding, and leaves the remaining amount of money untouched where it is currently invested?

Suggest at least two conditions that Emily and Paul could take to accumulate more for their retirement.

Suppose that Emily and Paul purchase a $200,000 home in 5 years and make $40,000 down payment immediately. Find the monthly mortgage payment assuming that the remaining balance is financed at a 3% fixed rate for 15 What if its mortgage term is 30 years?

What can you conclude about the relationship between the mortgage term and the amount of the monthly payment? From Question 5, is the monthly payment with the 30-year term half as large as the monthly payment with the 15-year term? Explain.

Deductive reasoning skill: Deductive reasoning is a logical process in which a conclusion is based on the concordance of multiple premises that are generally assumed to be true. Please watch the video clip provided on Deductive Reasoning

Do the following problems (Q1 – Q5) and then, answer the last question (Q6) using the deductive reasoning skill.

Use the following information to answer the following questions.

ABC, Inc. Income Statement (in thousands)

December 31, 2014

Sales

$200,000

Cost of goods sold

140,000

Gross profit on sales

60,000

Operating expenses

56,000

Operating income (EBIT)

4,000

Interest expense

1,000

Earnings before tax

3,000

Income tax

1,050

Net income available to common stockholders $1,950

Number of shares outstanding

1, 500

Market price per share

$22

ABC, Inc. Balance Sheet (in thousands)

December 31, 2014

Assets

Cash

$2,000

Accounts receivable

17,800

Inventories

8,700

Total current assets

28,500

Gross fixed assets

70,000

Accumulated depreciation

26,500

Net fixed assets

43,500

Total assets

$72,000

Liabilities and Equity

Accounts payable

$18,000

Accruals

13,350

Total current liabilities

31,350

Long-term debt

8,250

Total liabilities

39,600

Common stock (par value and paid in capital) 2,000

Retained earnings

30,400

Total stockholders’ equity

32,400

Total liabilities and equity

$72,000

Industry Key Ratios

Industry Average Ratios

Current ratio 1.1

Quick ratio 0.60

Days Sales Outstanding (DSO) 25 days Fixed assets turnover 5.8

Total asset turnover 2.95

Liabilities-to-assets ratio 65%

Times-interest-earned 3.2

Net profit margin 1.3%

Return on equity 7.32% Price/earnings ratio 20.38

Market/book ratio 3.19

Calculate current ratio and acid test ratio for the

Calculate DSO, fixed assets turnover, and total asset turnover for the

Calculate liabilities-to-assets ratio and times-interest-earned ratio for the

Calculate net profit margin and return on equity for the

Evaluate the performance of the firm in the following areas: Liquidity management

Asset management Debt management

Profitability management

When you explain the firm’s strength or weakness in each area, you must support your arguments through the evaluative reasoning process by providing reasons, methods, criteria, or assumptions behind the claims made.

Deductive reasoning starts with a general principle and deduces that it applies to a specific Deductive reasoning moves with exacting precision from the assumed truth of a set of premises to a conclusion which cannot be false if those premises are true. Explain the deductive reasoning process applied to analyze the firm’s performance.