Critical Thinking Skills Assignment
(1) 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%.
1. 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.
2. 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 savings. What if
she could earn 10% on her savings?
3. 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?
4. Suggest at least two conditions that Emily and Paul could take to accumulate more for
5. 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 years. What if its mortgage term
is 30 years?
6. 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.
(2) 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
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
Accounts receivable 17,800
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
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%
Net profit margin 1.3%
Return on equity 7.32%
Price/earnings ratio 20.38
Market/book ratio 3.19
1. 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:
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.
6. Deductive reasoning starts with a general principle and deduces that it applies to a
specific case. 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.