Question

Measures of liquidity, Solvency, and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 56 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$3,886,350		$3,272,750
Net income			864,000		670,300
Total			$4,750,350		$3,943,050
Dividends:
	On preferred stock		$11,200		$11,200
	On common stock		45,500		45,500
		Total dividends	$56,700		$56,700
Retained earnings, December 31			$4,693,650		$3,886,350

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$5,273,520		$4,858,760
Cost of goods sold	1,949,100		1,793,170
Gross profit	$3,324,420		$3,065,590
Selling expenses	$1,110,950		$1,365,420
Administrative expenses	946,360		801,910
Total operating expenses	$2,057,310		$2,167,330
Income from operations	$1,267,110		$898,260
Other revenue	66,690		57,340
	$1,333,800		$955,600
Other expense (interest)	352,000		193,600
Income before income tax	$981,800		$762,000
Income tax expense	117,800		91,700
Net income	$864,000		$670,300

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			20Y2		20Y1
Assets
Current assets
	Cash		$833,470		$851,380
	Marketable securities		1,261,470		1,410,850
	Accounts receivable (net)		970,900		912,500
	Inventories		730,000		569,400
	Prepaid expenses		157,687		170,280
		Total current assets	$3,953,527		$3,914,410
Long-term investments			2,933,408		880,941
Property, plant, and equipment (net)			5,280,000		4,752,000
Total assets			$12,166,935		$9,547,351
Liabilities
Current liabilities			$1,363,285		$1,531,001
Long-term liabilities:
	Mortgage note payable, 8%		$1,980,000		$0
	Bonds payable, 8%		2,420,000		2,420,000
		Total long-term liabilities	$4,400,000		$2,420,000
Total liabilities			$5,763,285		$3,951,001
Stockholders' Equity
Preferred $0.70 stock, $50 par			$800,000		$800,000
Common stock, $10 par			910,000		910,000
Retained earnings			4,693,650		3,886,350
Total stockholders' equity			$6,403,650		$5,596,350
Total liabilities and stockholders' equity			$12,166,935		$9,547,351

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

1. Working capital	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield		%

Answer 1

1. Working capital = Current Assets - Current Liabilities = 3,953,527 - 1,363,285 = 1,590,242

2. Current ratio = Current Assets / Current Liabilities = 3,953,527 / 1,363,285 = 2.9

3. Quick ratio = Quick Assets / Current Liabilities = (833470 + 1261470 + 970900 ) / 1,363,285 = 2.25

4. Accounts receivable turnover = Sales / Avg. Accounts Receivable = 5,273,520 / ( 970,900 + 912,500 ) / 2

                                                                                                   = 5273520 / 941700 = 5.6

5. Number of days' sales in receivables = 365 / Accounts receivable turnover = 365 / 5.6 = 65.18 Days

6. Inventory turnover = Cost of goods sold / Avg. Inventory = 1,949,100 / ( 730,000 + 569400 ) / = 1949100 / 649700 = 3

7. Number of days' sales in inventory = 365 / Inventory turnover = 365 / 3 = 121.67 Days

8. Ratio of fixed assets to long-term liabilities = 5,280,000 / 4,400,000 = 1.2

9. Ratio of liabilities to stockholders' equity = 5,763,285 / 6,403,650 = 0.9

10. Times interest earned = EBIT / Interest Expense = 1,333,800 / 352,000 = 3.79

11. Asset turnover = Sales / Avg. Total Assets = 5,273,520 / ( 12,166,935 + 9,547,351 ) / 2

                                                                   = 5,273,520 / 10857143 = 0.49

12. Return on total assets = Net Income / Avg. Total Assets = 864000 / 10857143 = 7.96%

13. Return on stockholders’ equity = Net Income / Avg. Total stockholders' equity = 864000 /( 6,403,650 + 5,596,350 ) / 2

                                                                                                                      = 864000 / 6000000 = 14.4%

14. Return on common stockholders’ equity = (Net Income - preferred dividends) /Avg. common stockholders' equity

                                                                = ( 864000 - 11200 ) / ( 910000 + 910000 + 4,693,650 + 3,886,350 ) / 2

                                                                = 852800 / 5200000 = 16.45

15. Earnings per share on common stock = (Net Income - preferred dividends) / Number of Outstanding shares

                                                            = 852800 / 91000 = 9.37

16. Price-earnings ratio = Market Price / EPS = 56 / 9.37 = $5.98

17. Dividends per share of common stock = Common stock dividend) / No. of oustanding shares = 45500 / 91000 = $0.5

18. Dividend yield = Dividends per share of common stock / Market Price = $0.5 / 56 = 0.89%