Question

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 61 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$ 920,575		$ 780,625
Net income			198,800		159,900
Total			$ 1,119,375		$ 940,525
Dividends
	On preferred stock		$ 6,300		$ 6,300
	On common stock		13,650		13,650
		Total dividends	$ 19,950		$ 19,950
Retained earnings, December 31			$ 1,099,425		$ 920,575

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 1,103,760		$ 1,016,910
Cost of goods sold	402,230		370,050
Gross profit	$ 701,530		$ 646,860
Selling expenses	$ 226,010		$ 276,050
Administrative expenses	192,520		162,130
Total operating expenses	418,530		438,180
Income from operations	$ 283,000		$ 208,680
Other income	14,900		13,320
	$ 297,900		$ 222,000
Other expense (interest)	72,000		40,000
Income before income tax	$ 225,900		$ 182,000
Income tax expense	27,100		22,100
Net income	$ 198,800		$ 159,900

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 218,220		$ 199,340
	Marketable securities		330,280		330,340
	Accounts receivable (net)		211,700		197,100
	Inventories		160,600		116,800
	Prepaid expenses		41,282		39,870
		Total current assets	$ 962,082		$ 883,450
Long-term investments			638,883		299,299
Property, plant, and equipment (net)			1,080,000		972,000
Total assets			$ 2,680,965		$ 2,154,749
Liabilities
Current liabilities			$ 291,540		$ 344,174
Long-term liabilities
	Mortgage note payable, 8 %		$ 400,000		$ 0
	Bonds payable, 8 %		500,000		500,000
		Total long-term liabilities	$ 900,000		$ 500,000
Total liabilities			$ 1,191,540		$ 844,174
Stockholders' Equity
Preferred $ 0.70 stock, $ 20 par			$ 180,000		$ 180,000
Common stock, $ 10 par			210,000		210,000
Retained earnings			1,099,425		920,575
	Total stockholders' equity		$ 1,489,425		$ 1,310,575
Total liabilities and stockholders' equity			$ 2,680,965		$ 2,154,749

Required:

Determine the following measures for 20Y2, 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.

1. Working capital	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield		%

Answer 1

1) Working capital= Current assets-Current liabilities

= $962082-291540= $670542

2) Current ratio= Current assets/Current liabilities

= $962082/291540= 3.3

3) Quick assets= Total current assets-Inventory-Prepaid expenses

= $962082-160600-41282= $760200

Quick ratio= Quick assets/Current liabilities

= $760200/291540= 2.6

4) Average accounts receivable= ($211700+197100)/2= $204400

Accounts receivable turnover= Net sales/Average accounts receivable

= $1103760/204400= 5.4

5) Number of days' sales in receivables= 365 days/Accounts receivable turnover

= 365/5.4= 67.6 days

6) Average inventory= ($160600+116800)/2= $138700

Inventory turnover= Cost of goods sold/Average inventory

= $402230/138700= 2.9

7) Number of days' sales in inventory= 365 days/Inventory turnover

= 365/2.9= 125.9 days

8) Ratio of fixed assets to long-term liabilities= Total fixed assets/Total long term liabilities

= $1080000/900000= 1.2

9) Ratio of liabilities to stockholders' equity= Total liabilities/Total stockholders' equity

= $1191540/1489425= 0.8

10) Times interest earned= (Net income+Income tax expense+Interest expense)/Interest expense

= ($198800+27100+72000)/72000= 4.1

11) Average total assets= ($2680965+2154749-638883-299299)/2= $1948766

Asset turnover= Net sales/Average total assets

= $1103760/1948766= 0.6

12) Average total assets= ($2680965+2154749)/2= $2417857

Return on total assets= (Net income+Interest expense)*100/Average total assets

= $(198800+72000)*100/2417857= 11.2%

13) Average stockholders’ equity= ($1489425+1310575)/2= $1400000

Return on stockholders’ equity= Net income*100/Average stockholders’ equity

= $198800*100/1400000= 14.2%

14) Average common stockholders’ equity= ($210000+1099425+210000+920575)/2= $1220000

Return on common stockholders’ equity= (Net income-Preferred dividend)*100/Average common stockholders’ equity

= ($198800-6300)*100/1220000= 15.8%

15) Weighted average shared outstanding= ($210000+210000)/10/2= 21000

Earnings per share on common stock= (Net income-Preferred dividend)/Weighted average shared outstanding

= ($198800-6300)/21000= $9.2

Price-earnings ratio= Market price/Earning per share

= $61/9.2= 6.6

17) Dividends per share of common stock= Dividend on common stock/Weighted average shared outstanding

= $13650/21000= $0.65

18) Dividend yield= Dividends per share of common stock*100/Market price

= $0.65*100/61= 1.1%

1. Working capital	$670542
2. Current ratio	3.3
3. Quick ratio	2.6
4. Accounts receivable turnover	5.4
5. Number of days' sales in receivables	67.6	days
6. Inventory turnover	2.9
7. Number of days' sales in inventory	125.9	days
8. Ratio of fixed assets to long-term liabilities	1.2
9. Ratio of liabilities to stockholders' equity	0.8
10. Times interest earned	4.1
11. Asset turnover	0.6
12. Return on total assets	11.2	%
13. Return on stockholders’ equity	14.2	%
14. Return on common stockholders’ equity	15.8	%
15. Earnings per share on common stock	$9.2
16. Price-earnings ratio	6.6
17. Dividends per share of common stock	$0.65
18. Dividend yield	1.1	%

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