EPS $ 1 $ 1 Proportion of Cash earnings and Accrual earnings (in percentage) 90:10 70;30...

EPS	$ 1	$ 1
Proportion of Cash earnings and Accrual earnings (in percentage)	90:10	70;30

Which firms would you invest and why ?

Hints: Which firms EPS reflects better earnings quality ?

Can you think ?

Expert Solution

In Firm 1 :-90% earning is in cash and 10% is accrual

Where as in Firm 2 :- 70% earning is cash and 30% is accrual

Firm 1’s cash earning capacity is more means firm 1 can invest and utilize cash generated for future operation more than firm 2 .

Firm 1’s High cash ratio earning shows low opportunity loss to firm 1.

Firm 1’s High cash ratio earning indicates low chance of bed debts compare to Firm 2

Firm 1’s High Cash ratio earning indicates less working capital requirement in firm 1 compare to firm 2 because cash generated from operation can be reinvested more than firm 2.

Firm 1's High Cash ratio indicates favorable quick ratio compare to firm b

Conclusion : There for from above all discussion and explanation I would advice to invest in firm A because of high Cash earning compare to firm B.

ekkarill92 answered 2 years ago

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