Question

Long-term debt ratio	0.1
Times interest earned	8.0
Current ratio	1.4
Quick ratio	1.0
Cash ratio	0.4
Inventory turnover	4.0
Average collection period	73	days

Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

Long-term debt ratio	0.1
Times interest earned	8.0
Current ratio	1.4
Quick ratio	1.0
Cash ratio	0.4
Inventory turnover	4.0
Average collection period	73	days

Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

INCOME STATEMENT

(Figures in $ millions)
Net Sales
Cost of Goods
Selling, general, and admin exp		25.00
Depreciation		35.00
Earnings before interest and taxes
Income Before tax
Tax (35% of income before tax)
Net Income

BALANCE SHEET
(Figures in $ millions)
	This Year	Last Year
Assets
Cash and marketable securities		$35
Accounts receivable		49
Inventories		41
Total current assets		$125
Net property, plant, and equipment		40
Total assets		$165
Liabilities and shareholders’ equity
Accounts payable	$15.00	$10
Notes payable	20.00	25
Total current liabilities		$35
Long-term debt		23
Shareholders’ equity		107
Total liabilities and shareholders’ equity	$270.00	$165

Answer 1

INVENTORY TURNOVER = 4

INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / OPENING INVENTORY

=> 4 = COST OF GOODS SOLD / 41

=> 4 *41 = COST OF GOODS SOLD

=> COST OF GOODS SOLD = $164 MILLION

AVERAGE COLLECTION PERIOD = 73 DAYS

AVERAGE COLLECTION PERIOD = (OPENING ACCOUNTS RECEIVABLES / CREDIT SALES) * 365 DAYS

=> 73 = (49 / CREDIT SALES) *365

=> CREDIT SALES = (49 * 365) / 73

=> CREDIT SALES = $245 MILLION

EBIT = NET SALES - COST OF GOODS SOLD - SELLING,GENERAL AND ADMINISTRATION EXPENSES - DEPRECIATION

=> EBIT = 245 - 164 - 25 - 35 = $21 MILLION

TIMES INTEREST EARNED RATIO = 8.0

TIMES INTEREST EARNED RATIO = EBIT / INTEREST

=> 8 = 21 / INTEREST

=> INTEREST = 21 / 8 = $2.63 MILLION

INCOME BEFORE TAX = EBIT - INTEREST

=> INCOME BEFORE TAX = 21 - 2.63 =$18.37 MILLION

TAX = 35% ON INCOME BEFORE TAX

= 18.37 * 35% = $6.43MILLION

NET INCOME = INCOME BEFORE TAX - TAX

= 18.37 - 6.43 = $11.94 MILLION

CURRENT RATIO = 1.4

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

=> 1.4 = CURRENT ASSETS / ACCOUNTS PAYABLE + NOTES PAYABLE

=> 1.4 = CURRENT ASSETS / 35

=> CURRENT ASSETS = 1.4 * 35 = $49 MIILION

QUICK RATIO = 1

QUICK RATIO = (CURRENT ASSETS - INVENTORY) / CURRENT LIABILITIES

=> 1 = (49 - INVENTORY) / 35

=> INVENTORY = 49 - 35 = $14 MILLION

CASH RATIO = 0.4

CASH RATIO = CASH AND CASH EQUIVALENTS / CURRENT LIABILITIES

=> 0.4 = CASH AND CASH EQUIVALENTS / 35

=> CASH AND CASH EQUIVALENTS = 35 * 0.4 = $14 MILLION

CURRENT ASSETS = CASH + ACCOUNTS RECEIVABLES + INVENTORY

=> 49 = 14 + 14 + ACCOUNTS RECEIVABLES

=> ACCOUNTS RECEIVABLES = 49 - 28 = $21 MILLION

TOTAL ASSETS = $270 MILLION

CURRENT ASSETS = $ 49 MILLION

NET PROPERTY PLANT AND EQUIPMENT = 270 - 49 = $221 MILLION

LONG TERM DEBT RATIO = 0.1

LONG TERM DEBT RATIO = LONG TERM DEBT / TOTAL ASSETS

0.1 = LONG TERM DEBT / 270

=> LONG TERM DEBT = 0.1 * 270 = $27 MILLION

SHAREHOLDERS EQUITY = TOTAL LIABILITIES - CURRENT LIABILITIES - LONG TERM DEBTS

= 270 - 35 - 27 = $208 MILLION

RETURN ON EQUITY = (NET INCOME / SHAREHOLDERS EQUITY) * 100

= (11.94 / 208) * 100

= 5.74 %