Question

A Company has the following financial information for its first year in business: cash of $242,...

A Company has the following financial information for its first year in business:

cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.

8. What is the interest coverage ratio?

                                   

             9. What will be the return on Equity if the Net sales increased to $3000? Interpret your results

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Answer #1

8. interest coverage ratio = EBIT/Interest

EBIT= Divident + addition to retain earnings + taxes +interest

=218+508+312+160=1198

interest coverage ratio =1198/160 =7.4875

9.Return on equity = net income / (common stock +retained earning)

Net income = addition to retained earnings+dividend paid

Here from net sales increased from 2,768$ to 3000$

Increased revenue from sales 3000-2768=232 (this also to be included in balance statement in addition earnings)

Net income= 508+232+218= 958

Return on equity = 958/1,160+1,620=.2929 or 20.29%

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