Question

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

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	13,900
Cost of goods sold		4,460
Other expenses		4,197
Depreciation		2,758
Earnings before interest and taxes (EBIT)	$	2,485
Interest expense		725
Income before tax	$	1,760
Taxes (at 30%)		528
Net income	$	1,232
Dividends	$	936

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	97			$	166
Receivables		2,782				2,650
Inventories		227				278
Other current assets		907				972
Total current assets	$	4,013			$	4,066
Net property, plant, and equipment		20,053				19,995
Other long-term assets		4,296				3,850
Total assets	$	28,362			$	27,911
Liabilities and shareholders’ equity
Payables	$	2,644			$	3,120
Short-term debt		1,459				1,613
Other current liabilities		851				827
Total current liabilities	$	4,954			$	5,560
Long-term debt and leases		5,026				5,401
Other long-term liabilities		6,258				6,229
Shareholders’ equity		12,124				10,721
Total liabilities and shareholders’ equity	$	28,362			$	27,911

Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

a.Return on equity (use average balance sheet figures)______%

b.Return on assets (use average balance sheet figures)______%

c.Return on capital (use average balance sheet figures)______%

d.Days in inventory (use start-of-year balance sheet figures)____days

e.Inventory turnover (use start-of-year balance sheet figures)

f.Average collection period (use start-of-year balance sheet figures)____days

g.Operating profit margin ____%

h.Long-term debt ratio (use end-of-year balance sheet figures)

i.Total debt ratio (use end-of-year balance sheet figures)

j.Times interest earned

k.Cash coverage ratio

l.Current ratio (use end-of-year balance sheet figures)

m.Quick ratio (use end-of-year balance sheet figures)

Answer 1

Answer:

a. Return on equity = (Net income / Average Shareholders' equity) * 100
Average shareholder's equity = (12,124 + 10,721) / 2 =11,423
Return on equity = (1,232 / 11423) * 100 = 10.79%

b. Return on assets = (Net income / Average Total assets) * 100
Average total assets = (28,362 + 27,911) / 2 = 28,137
Return on assets = (1,232 / 28,137) * 100 = 4.38%

c. Return on capital = (EBIT / Average Capital employed) * 100
Average capital employed = (28,362 + 27,911) / 2 = 28,137
Return on capital = (2,485 / 28,137) * 100 = 8.83%

d. Days' in inventory = (Inventory / Cost of goods sold) * 365
Days' in inventory = (278 / 4,460) * 365
Days' in inventory = 22.75 days

e. Inventory turnover = Cost of goods sold/ Inventory
Inventory turnover = 4,460 / 278 = 16.04

f. Average collection period = (Accounts receivables / Sales) * 365
Average collection period = (2,650 / 13,900) * 365
Average collection period = 69.59 days

g. Operating profit margin = (Operating profit / Net sales) * 100
Operating profit margin = (2,485 / 13,900) * 100
Operating profit margin = 17.88%

h. Long term debt ratio = Long term debt / Shareolders' equity
Long term debt ratio = 11,284 / 12,124 = 0.93

i. Total debt ratio = Total debt / Shareholders' equity
Total debt ratio = 16,238 / 12,124 = 1.34

j. Times interest earned ratio = EBIT / Total interest expense
Times interest earned ratio = 2,485 / 725
Times interest earned ratio = 3.43

k. Cash coverage ratio = Cash and cash equivalents / Total current liabilities
Cash coverage ratio = 97 / 4,954
Cash coverage ratio = 0.0195

l. Current ratio = Current assets / Current liabilities
Current ratio = 4,013 / 4,954
Current ratio = 0.81

m. Quick ratio = (Current assets - Inventory) / Current Liabilities
Quick ratio = (4,013 - 227) / 4,954
Quick ratio = 0.76