Question

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

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	13,800
Cost of goods sold		4,410
Other expenses		4,182
Depreciation		2,728
Earnings before interest and taxes (EBIT)	$	2,480
Interest expense		720
Income before tax	$	1,760
Taxes (at 35%)		616
Net income	$	1,144
Dividends	$	926

  

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	96			$	165
Receivables		2,732				2,630
Inventories		222				273
Other current assets		902				967
Total current assets	$	3,952			$	4,035
Net property, plant, and equipment		20,043				19,985
Other long-term assets		4,286				3,840
Total assets	$	28,281			$	27,860
Liabilities and shareholders’ equity
Payables	$	2,634			$	3,110
Short-term debt		1,454				1,608
Other current liabilities		846				822
Total current liabilities	$	4,934			$	5,540
Long-term debt and leases		5,275				5,580
Other long-term liabilities		6,248				6,219
Shareholders’ equity		11,824				10,521
Total liabilities and shareholders’ equity	$	28,281			$	27,860

Calculate the following financial ratios for Phone Corporation:

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.

Average Shareholders’ Equity = ($11,824 + $10,521) / 2
Average Shareholders’ Equity = $11,172.50

Return on Equity = Net Income / Average Shareholders’ Equity
Return on Equity = $1,144 / $11,172.50
Return on Equity = 0.1024 or 10.24%

Answer b.

Average Total Assets = ($28,281 + $27,860) / 2
Average Total Assets = $28,070.50

Return on Assets = [Net Income + Interest Expense * (1 - tax)] / Average Total Assets
Return on Assets = [$1,144 + $720 * (1 - 0.35)] / $28,070.50
Return on Assets = $1,612 / $28,070.50
Return on Assets = 0.0574 or 5.74%

Answer c.

Average Capital = Average Shareholders’ Equity + Average Long-term Debt and Leases
Average Capital = ($11,824 + $10,521) / 2 + ($5,275 + $5,580) / 2
Average Capital = $16,600

Return on Capital = [Net Income + Interest Expense * (1 - tax)] / Average Capital
Return on Capital = [$1,144 + $720 * (1 - 0.35)] / $16,600
Return on Capital = $1,612 / $16,600
Return on Capital = 0.0971 or 9.71%

Answer d.

Days in Inventory = 365 * Inventory / Cost of Goods Sold
Days in Inventory = 365 * $273 / $4,410
Days in Inventory = 22.60 days

Answer e.

Inventory Turnover = Cost of Goods Sold / Inventory
Inventory Turnover = $4,410 / $273
Inventory Turnover = 16.15 times