Troy University Detective Reasoning Skills Report
(1) Evaluation skill: Evaluation is associated with the ability to judge the value of material for agiven purpose. The judgements are to be based on definite criteria. These criteria may bedetermined by relevance, purpose, statements, and numerical values or calculations. Pleasewatch the video clips provided on Evaluating Logic Part 1,2 and 3Read 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. Sheis 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 paymenton the car and finance the balance. Fortunately, she expects a sizable bonus this year that shehopes 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 yearsin the future, after he finishes medical school. In addition, Emily and Paul want to buy a home oftheir own in 5 years. This might be possible because two years later, Emily will be eligible toaccess a trust fund left to her as an inheritance by her late grandfather. Her trust fund has $80,000invested at an interest rate of 5%.1. Justify Emily’s participation in her employer’s 401(k) plan using the time value of moneyconcepts by calculating the actual annual return on her own contributions. She willcontribute $1,000 per year to her 401(k) for 25 years and the employer will match dollarfor dollar. Assume that her 401(k) earns 6% per year for 25 years and all contributionsare made at the end of each year.2. Calculate the amount of money that Emily needs to set aside from her bonus this year tocover the down payment on a new car, assuming she can earn 4% on her savings. What ifshe could earn 10% on her savings?3. What will be the value of Emily’s trust fund in 36 years, assuming she takes possessionof $20,000 in 2 years for her wedding, and leaves the remaining amount of moneyuntouched where it is currently invested?4. Suggest at least two conditions that Emily and Paul could take to accumulate more fortheir retirement.5. Suppose that Emily and Paul purchase a $200,000 home in 5 years and make $40,000down payment immediately. Find the monthly mortgage payment assuming that theremaining balance is financed at a 3% fixed rate for 15 years. What if its mortgage termis 30 years?6. What can you conclude about the relationship between the mortgage term and the amountof the monthly payment? From Question 5, is the monthly payment with the 30-year termhalf as large as the monthly payment with the 15-year term? Explain.(2) Deductive reasoning skill: Deductive reasoning is a logical process in which a conclusion isbased on the concordance of multiple premises that are generally assumed to be true. Pleasewatch the video clip provided on Deductive ReasoningDo the following problems (Q1 – Q5) and then, answer the last question (Q6) using thedeductive reasoning skill.Use the following information to answer the following questions.ABC, Inc. Income Statement (in thousands)December 31, 2014Sales $200,000Cost of goods sold 140,000Gross profit on sales 60,000Operating expenses 56,000Operating income (EBIT) 4,000Interest expense 1,000Earnings before tax 3,000Income tax 1,050Net income available to common stockholders $1,950Number of shares outstanding 1, 500Market price per share $22ABC, Inc. Balance Sheet (in thousands)December 31, 2014AssetsCash $2,000Accounts receivable 17,800Inventories 8,700Total current assets 28,500Gross fixed assets 70,000Accumulated depreciation 26,500Net fixed assets 43,500Total assets $72,000Liabilities and EquityAccounts payable $18,000Accruals 13,350Total current liabilities 31,350Long-term debt 8,250Total liabilities 39,600Common stock (par value and paid in capital) 2,000Retained earnings 30,400Total stockholders’ equity 32,400Total liabilities and equity $72,000Industry Key RatiosIndustry Average RatiosCurrent ratio 1.1Quick ratio 0.60Days Sales Outstanding (DSO) 25 daysFixed assets turnover 5.8Total asset turnover 2.95Liabilities-to-assets ratio 65%Times-interest-earned 3.2Net profit margin 1.3%Return on equity 7.32%Price/earnings ratio 20.38Market/book ratio 3.191. Calculate current ratio and acid test ratio for the firm.2. Calculate DSO, fixed assets turnover, and total asset turnover for the firm.3. Calculate liabilities-to-assets ratio and times-interest-earned ratio for the firm.4. Calculate net profit margin and return on equity for the firm.5. Evaluate the performance of the firm in the following areas:Liquidity managementAsset managementDebt managementProfitability managementWhen you explain the firm’s strength or weakness in each area, you must support yourarguments through the evaluative reasoning process by providing reasons, methods,criteria, or assumptions behind the claims made.6. Deductive reasoning starts with a general principle and deduces that it applies to aspecific case. Deductive reasoning moves with exacting precision from the assumed truthof 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.
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