Question

Horatio's Hot Dogs current assets equal $260,000. The company's return on assets (ROA) is 4 percent, its net income is $140,000, its long-term debt equals $1,755,000, and 35 percent of its assets are financed with common equity. Horatio's has no preferred stock. Computer the company's current ratio.

Need step by step directions.

Answer 1

current ratio = Current Assets / Current Liabilities

return on assets = Net income / Total Assets

4%= $ 140,000 / Total Assets

or Total Assets = $140,000/4%

= $ 3,500,000

Total Assets = Total Debt + Total Equity

$ 3,500,000= Long Term Debt + Current Laibilties + Total Equity

$ 3,500,000= $ 1,755,000 + Current Liabilities + ( 35% * $ 3,500,000)

$ 3,500,000= $ 1,755,000 + Current Liabilities + $ 1,225,000

or Current Liabilities = $ 3,500,000 - $ 2,980,000

= $ 520,000

Now, current ratio = Current Assets / Current Liabilities

Hence Current Ratio = $260,000/$ 520,000

= 0.50

Hence the correct answer is 0.50