Question

Here are simplified financial statements for Phone Corporation in a recent year:

  

INCOME STATEMENT (Figures in $ millions)
Net sales	$ 13,600
Cost of goods sold	4,310
Other expenses	4,162
Depreciation	2,668
Earnings before interest and taxes (EBIT)	$ 2,460
Interest expense	710
Income before tax	$ 1,750
Taxes (at 30%)	525
Net income	$ 1,225
Dividends	$ 906

  

BALANCE SHEET
(Figures in $ millions)
		End of Year				Start of Year
Assets
Cash and marketable securities		$	94			$	163
Receivables			2,632				2,590
Inventories			212				263
Other current assets			892				957
Total current assets		$	3,830			$	3,973
Net property, plant, and equipment			20,023				19,965
Other long-term assets			4,266				3,820
Total assets		$	28,119			$	27,758
Liabilities and shareholders’ equity
Payables		$	2,614			$	3,090
Short-term debt			1,444				1,598
Other current liabilities			836				812
Total current liabilities		$	4,894			$	5,500
Long-term debt and leases			5,773				5,938
Other long-term liabilities			6,228				6,199
Shareholders’ equity			11,224				10,121
Total liabilities and shareholders’ equity		$	28,119			$	27,758

  

Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your percentage answers "Return on equity", "Return on assets", Return on capital" and "Operating profit margin" to 2 decimal places and the rest to 2 decimal places.)

  

a.	Return on equity (Use average equity.)		%
b.	Return on assets (Use after-tax operating income and average assets.)		%
c.	Return on capital (Use after-tax operating income and average capital.)		%
d.	Days in inventory (Use beginning inventory.)		days
e.	Inventory turnover (Use beginning inventory.)
f.	Average collection period (Use beginning receivables.)		days
g.	Operating profit margin (Use after-tax operating income.)		%
h.	Long-term debt ratio (Use end of year values.)
i.	Total debt ratio (Use end of year values.)
j.	Times interest earned
k.	Cash coverage ratio
l.	Current ratio (Use end of year values.)
m.	Quick ratio (Use end of year values.)

Answer 1

Answer a.

Average Equity = ($11,224 + $10,121) / 2
Average Equity = $10,672.50

Return on Equity = Net Income / Average Equity
Return on Equity = $1,225 / $10,672.50
Return on Equity = 11.48%

Answer b.

After-tax Operating Income = EBIT * (1 - tax)
After-tax Operating Income = $2,460 * (1 - 0.30)
After-tax Operating Income = $1,722

Average Assets = ($28,119 + $27,758) / 2
Average Assets = $27,938.50

Return on Assets = After-tax Operating Income / Average Assets
Return on Assets = $1,722 / $27,938.50
Return on Assets = 6.16%

Answer c.

After-tax Operating Income = EBIT * (1 - tax)
After-tax Operating Income = $2,460 * (1 - 0.30)
After-tax Operating Income = $1,722

Average Capital = ($5,773 + $11,224 + $5,938 + $10,121) / 2
Average Capital = $16,528

Return on Capital = After-tax Operating Income / Average Capital
Return on Capital = $1,722 / $16,528
Return on Capital = 10.42%

Answer d.

Days in Inventory = 365 * Inventory / Cost of Goods Sold
Days in Inventory = 365 * $263 / $4,310
Days in Inventory = 22.27 days

Answer e.

Inventory Turnover = Cost of Goods Sold / Inventory
Inventory Turnover = $4,310 / $263
Inventory Turnover = 16.39 times

Answer f.

Average Collection Period = 365 * Accounts Receivable / Net Sales
Average Collection Period = 365 * $2,590 / $13,600
Average Collection Period = 69.51 days