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Nineteen Measures of The ability of a firm to pay its debts as they come due.Solvency...

  1. Nineteen Measures of The ability of a firm to pay its debts as they come due.Solvency and The ability of a firm to earn income.Profitability

    The comparative financial statements of Blige Inc. are as follows. The market price of Blige Inc. common stock was $61 on December 31, 2016.

    Blige Inc.
    Comparative Retained Earnings Statement
    For the Years Ended December 31, 2016 and 2015
        2016     2015
    Retained earnings, January 1 $1,943,600 $1,645,700
    Add net income for year 432,000 337,100
    Total $2,375,600 $1,982,800
    Deduct dividends
    On preferred stock $7,000 $7,000
    On common stock 32,200 32,200
    Total $39,200 $39,200
    Retained earnings, December 31 $2,336,400 $1,943,600
    Blige Inc.
    Comparative Income Statement
    For the Years Ended December 31, 2016 and 2015
        2016     2015
    Sales $2,575,110 $2,369,100
    Sales returns and allowances 12,810 8,330
    Sales $2,562,300 $2,360,770
    Cost of goods sold 995,720 916,060
    Gross profit $1,566,580 $1,444,710
    Selling expenses $503,840 $626,030
    Administrative expenses 429,190 367,670
    Total operating expenses 933,030 993,700
    Income from operations $633,550 $451,010
    Other income 33,350 28,790
    $666,900 $479,800
    Other expense (interest) 176,000 96,800
    Income before income tax $490,900 $383,000
    Income tax expense 58,900 45,900
    Net income $432,000 $337,100
    Blige Inc.
    Comparative Balance Sheet
    December 31, 2016 and 2015
        Dec. 31, 2016     Dec. 31, 2015
    Assets
    Current assets
    Cash $535,350 $428,450
    Temporary investments 810,260 709,990
    Accounts receivable (net) 489,100 459,900
    Inventories 365,000 277,400
    Prepaid expenses 101,274 85,690
    Total current assets $2,300,984 $1,961,430
    Long-term investments 912,176 248,553
    Property, plant, and equipment (net) 2,860,000 2,574,000
    Total assets $6,073,160 $4,783,983
    Liabilities
    Current liabilities $676,760 $770,383
    Long-term liabilities
    Mortgage note payable, 8%, due 2021 $990,000 $0
    Bonds payable, 8%, due 2017 1,210,000 1,210,000
    Total long-term liabilities $2,200,000 $1,210,000
    Total liabilities $2,876,760 $1,980,383
    Stockholders' Equity
    Preferred $0.7 stock, $40 par $400,000 $400,000
    Common stock, $10 par 460,000 460,000
    Retained earnings 2,336,400 1,943,600
    Total stockholders' equity $3,196,400 $2,803,600
    Total liabilities and stockholders' equity $6,073,160 $4,783,983

    Required:

    Determine the following measures for 2016, 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.

    5. The relationship between sales and accounts receivable, computed by dividing the average accounts receivable by the average daily sales.Number of days' sales in receivables days
    6. The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory.Inventory turnover
    7. The relationship between the volume of sales and inventory, computed by dividing average inventory by the average daily cost of goods sold.Number of days' sales in inventory days
    8. The ratio of fixed assets to long-term liabilities provides a measure of whether note-holders or bondholders will be paid.Ratio of fixed assets to long-term liabilities
    9. The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity.Ratio of liabilities to stockholders' equity
    10. A ratio that measures creditor margin of safety for interest payments, calculated as income before income tax + interest expense divided by interest expense.Number of times interest charges are earned
    11. A ratio that measures the risk that preferred dividends will not be paid if earnings decrease, calculated by dividing net income by the amount of preferred dividends.Number of times preferred dividends are earned
    12. Ratio that measures how effectively a company uses its assets, computed as sales divided by average total assets.Ratio of sales to assets
    13. A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.Rate earned on total assets %
    14. A measure of profitability computed by dividing net income by average stockholders' equity.Rate earned on stockholders' equity %
    15. A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Rate earned on common stockholders' equity %
    16. The profitability ratio of net income available to common shareholders to the number of common shares outstanding.Earnings per share on common stock $
    17. The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.Price-earnings ratio
    18. Measures the extent to which earnings are being distributed to common shareholders.Dividends per share of common stock $
    19. A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions.Dividend yield

Solutions

Expert Solution

5 Number of days sales in receivables=Average accounts receivable/Average daily sales
Average daily sales=Net sales/365=2562300/365=$ 7070
Average accounts receivable=(Beg. Accounts receivable+End. Accounts receivable)/2=(459900+489100)/2=$ 474500
Number of days sales in receivables=474500/7070=67.1 days
6 Inventory turnover=Cost of goods sold/Average inventory
Average Inventory=(Beg. Inventory+End. Inventory)/2=(277400+365000)/2=$ 321200
Inventory turnover=995720/321200=3.1
7 Number of day's sales in inventory=Average inventory/Average daily cost of goods sold
Average daily cost of goods sold=Cost of goods sold/365=995720/365=$ 2728
Number of day's sales in inventory=321200/2728=117.7 days
8 Fixed assets to long-term liabilities=Fixed assets/Long-term liabilities
Fixed assets=Property,Plant and equipment=$ 2860000
Fixed assets to long-term liabilities=2860000/2200000=1.3
9 Liabilities to stockholder's equity=Liabilities/Stockholder's equity
Liabilities=Long-term liabilities=2200000
Stockholder's equity=$ 3196400
Liabilities to stockholder's equity=2200000/3196400=0.7
10 Number of times interest charges are earned=(income before income tax + interest expense)/Interest expense=(490900+176000)/176000=3.8
11 Number of times preferred dividends are earned=Net income/Preferred dividends=432000/7000=61.7 times
12 Ratio of sales to assets=Sales/Average total assets
Average Total assets=(Beg. Total assets+End. Total assets)/2=(4783983+6073160)/2=$ 5428572
Ratio of sales to assets=2562300/5428572=0.5
13 Rate earned on total assets=Net income/Average total assets=432000/5428572=0.07957=7.96%=8%
14 Rate earned on stockholder's equity=Net income/Average stockholder's equity
Average Stockholder's equity=(Beg. Stockholder's equity+End. Stockholder's equity)/2=(2803600+3196400)/2=$ 3000000
Rate earned on stockholder's equity=432000/3000000=0.144=14.4 %
15 Rate earned on common stockholders' equity=(Net income-preferred dividend)/Average common stockholder's equity
Beg.Common stockholder's equity=Common stock+Retained earnings=460000+1943600=$ 2403600
End.Common stockholder's equity=Common stock+Retained earnings=460000+2336400=$ 2796400
Average Common stockholder's equity=(Beg. Common stockholder's equity+End. Common stockholder's equity)/2=(2403600+2796400)/2=$ 2600000
Rate earned on common stockholders' equity=(432000-7000)/2600000=0.1634=16.3 %
16 Earnings per share on common stock=net income available to common shareholders/ number of common shares outstanding
net income available to common shareholders=Net income-Preferred dividend=432000-7000=$ 425000
Number of common shares outstanding=Common stock in $/par value=460000/10=46000 shares
Earnings per share on common stock=425000/46000=$ 9.2 per share
17 Price-earnings ratio=Market price per share/Earnings per share on common stock=61/9.2=6.6
18 Dividends per share of common stock=Common stock dividend/Number of common shares outstanding=32200/46000=0.7
19 Dividend yield=Dividends per share of common stock/market price per share=0.7/61=0.0115=1.15%
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