Question

Long-term debt ratio	0.3
Times interest earned	8.0
Current ratio	1.4
Quick ratio	1.0
Cash ratio	0.4
Inventory turnover	4.0
Average collection period	73	days

Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

INCOME STATEMENT
(Figures in $ millions)
Net sales
Cost of goods sold
Selling, general, and administrative expenses	11.00
Depreciation	21.00
Earnings before interest and taxes (EBIT)
Interest expense
Income before tax
Tax (35% of income before tax)
Net income

BALANCE SHEET (Figures in $ millions) This Year Last Year Assets Cash and marketable securities $21 Accounts receivable 35 Inventories 27 Total current assets $83 Net property, plant, and equipment 26 Total assets $109 Liabilities and shareholders’ equity Accounts payable $20.00 $15 Notes payable 25.00 30 Total current liabilities $45 Long-term debt 21 Shareholders’ equity 43 Total liabilities and shareholders’ equity $125.00 $109

Answer 1

Ans.

Total Current Liabilities = Accounts Payable + Notes Payable = $ 20 + $ 25 = $ 45

Current Ratio = Total Current Assets / Total Current Liabilities = 1.4

1.4 = Total Current Assets / $ 45

Total Current Assets = $ 45 * 1.4 = $ 63

Quick Ratio = Current Assets - Inventory / Total Current Liabilities = 1.0

1.0 = $ 63 - Inventory / $ 45

$ 45 = $ 63 - Inventory

Inventory = $ 63 - $ 45 = $ 18

Cash Ratio = Cash & Cash Equivalent / Total Current Liabilities = 0.4

0.4 = Cash & Cash Equivalent / $ 45

Cash & Cash Equivalent = $ 45 * 0.4 = $ 18

Total Current Assets = Cash & Cash Equivalent + Inventory + Accounts Rceivable

$ 63 = $ 18 + $ 18 + Accounts Rceivable

Accounts Rceivable = $ 63 - $ 18 - $ 18 = $27

Total Asset = Total Liabilities & Shareholder's Equity

So Total Assets = $ 125

Total Assets = Current Assets + Net property, plant, and equipment

$ 125 = $ 63 +Net property, plant, and equipment

Net property, plant, and equipment = $125 - $ 63 = $ 62

Long Term Debt Ratio = Long Term Debt / Total Assets = 0.3

0.3 = Long Term Debt / $ 125

Long Term Debt / = $ 125 * 0.3 = $37.50

Total liabilities and shareholders’ equity = Total Current Liabilities + Long Term Debt + Shareholders’ equity

$ 125 = $ 45 + $ 37.50 + Shareholders’ equity

Shareholders’ equity = $ 125 - $ 45 - $ 37.50 = $ 42.50

BALANCE SHEET
(Figures in $ millions)
	This Year	Last Year
Assets
Cash and marketable securities	$   18.00	$   21.00
Accounts receivable	$   27.00	$   35.00
Inventories	$   18.00	$   27.00
Total current assets	$   63.00	$   83.00
Net property, plant, and equipment	$   62.00	$   26.00
Total assets	$ 125.00	$ 109.00
Liabilities and shareholders’ equity
Accounts payable	$   20.00	$   15.00
Notes payable	$   25.00	$   30.00
Total current liabilities	$   45.00	$   45.00
Long-term debt	$ 37.50	$   21.00
Shareholders’ equity	$ 42.50	$   43.00
Total liabilities and shareholders’ equity	$ 125.00	$ 109.00

Now,

Average Collection Period = 365 * Beginning Accounts Receivable / Net Sales = 73 days

73 = 365 * $ 35 / Net Sales

Net Sales = 365 * $ 35 / 73 = $ 175

Inventory Turnover Ratio = Cost of Goods Sold / Beginning Inventory = 4

4 = Cost of Goods Sold / $ 27

Cost of Goods Sold / = $ 27 * 4 = $ 108

EBIT is calculated as

Net sales	$ 175.00
Cost of goods sold	$(108.00)
Selling, general, and administrative expenses	$ (11.00)
Depreciation	$ (21.00)
Earnings before interest and taxes (EBIT)	$    35.00

Times Interest Earned Ratio = EBIT / Interest Expense = 8

8 = $ 35 / Interest Expense

Interest Expense = $ 35 / 8 = $ 4.375

INCOME STATEMENT
(Figures in $ millions)
Net sales	$    175.00
Cost of goods sold	$ (108.00)
Selling, general, and administrative expenses	$     (11.00)
Depreciation	$     (21.00)
Earnings before interest and taxes (EBIT)	$      35.00
Interest expense	$       (4.38)
Income before tax	$      30.63
Tax (35% of income before tax)	$     (10.72)
Net income	$      19.91

Return on Equity = Net income/ Common Equity

Return on Equity = $ 19,906,250 / $ 42,500,000 = 0.46838 or 46.84%