Question

Twenty metrics of liquidity, Solvency, and Profitability

The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $56 on December 31, 20Y8.

AUTOMOTIVE SOLUTIONS INC. Comparative Income Statement For the Years Ended December 31, 20Y8 and 20Y7
	20Y8		20Y7
Sales	$1,314,000		$1,210,630
Cost of goods sold	(429,240)		(394,900)
Gross profit	$884,760		$815,730
Selling expenses	$(322,490)		$(384,810)
Administrative expenses	(274,710)		(226,000)
Total operating expenses	(597,200)		(610,810)
Operating income	$287,560		$204,920
Other revenue and expense:
Other income	15,140		13,080
Other expense (interest)	(80,000)		(44,000)
Income before income tax	$222,700		$174,000
Income tax expense	(26,700)		(21,300)
Net income	$196,000		$152,700

AUTOMOTIVE SOLUTIONS INC. Comparative Statement of Stockholders’ Equity For the Years Ended December 31, 20Y8 and 20Y7
	20Y8									20Y7
	Preferred Stock			Common Stock			Retained Earnings			Preferred Stock			Common Stock			Retained Earnings
Balances, Jan. 1		$200,000			$230,000			$880,675			$200,000			$230,000			$745,325
Net income								196,000									152,700
Dividends:
Preferred stock								(7,000)									(7,000)
Common stock								(10,350)									(10,350)
Balances, Dec. 31		$200,000			$230,000			$1,059,325			$200,000			$230,000			$880,675

AUTOMOTIVE SOLUTIONS INC. Comparative Balance Sheet December 31, 20Y8 and 20Y7
	Dec. 31, 20Y8		Dec. 31, 20Y7
Assets
Current assets:
Cash	$267,060		$187,470
Temporary investments	404,210		310,670
Accounts receivable (net)	226,300		211,700
Inventories	175,200		131,400
Prepaid expenses	50,527		37,490
Total current assets	$1,123,297		$878,730
Long-term investments	506,421		184,525
Property, plant, and equipment (net)	1,200,000		1,080,000
Total assets	$2,829,718		$2,143,255
Liabilities
Current liabilities	$340,393		$282,580
Long-term liabilities:
Mortgage note payable, 8%, due in 15 years	$450,000		$0
Bonds payable, 8%, due in 20 years	550,000		550,000
Total long-term liabilities	$1,000,000		$550,000
Total liabilities	$1,340,393		$832,580
Stockholders' Equity
Preferred $0.70 stock, $20 par	$200,000		$200,000
Common stock, $10 par	230,000		230,000
Retained earnings	1,059,325		880,675
Total stockholders' equity	$1,489,325		$1,310,675
Total liabilities and stockholders' equity	$2,829,718		$2,143,255

Instructions:

Determine the following measures for 20Y8. Round ratio values to one decimal place and dollar amounts to the nearest cent. For number of days' sales in receivables and number of days' sales in inventory, round intermediate calculations to the nearest whole dollar and final amounts to one decimal place. Assume there are 365 days in the year.

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

Answer 1

Requirement 1:

Working capital           = Current assets ─ Current liabilities

                                    = $1,123,297 ─ $340,393

                                    = $782,904

Requirement 2:

Current ratio                = Current assets ÷ Current liabilities

                                    = $1,123,297 ÷ $340,393

                                    = 3.3

Requirement 3:

Quick ratio                  = (Cash + Temp. investments + Accounts receivable) ÷ Current liabilities

                                    = ($267,060 + $404,210 + $226,300) ÷ $340,393

                                    = 2.6

Requirement 4:

Accounts receivable turnover = Net sales ÷Average accounts receivable

                                                = $1,314,000 ÷ (($226,300+ $211,700) ÷ 2)

= 6.0 times

Requirement 5:

Days’ sales in receivables        = 365 ÷ Accounts receivable turnover

= 365 ÷ 6 times

   = 60.8 days

Requirement 6:

Inventory turnover                  = Cost of goods sold ÷Average inventory

= $429,240 ÷ (($175,200 + $131,400) ÷ 2)

                                               = 2.8 times

Requirement 7:

Days’ sales in inventory          = 365 ÷ Inventory turnover

                                                = 365 ÷ 2.8 times

= 130.4 days

Requirement 8:

Debt ratio                    = Total liabilities ÷ Total assets

                                    = $1,340,393 ÷ $2,829,718

= 47.4%

Requirement 9:

Ratio of liabilities to stockholders' equity      = Total liabilities ÷ Total stockholders’ equity

= $1,340,393 ÷ $1,489,325

= 0.9

Requirement 10:

Ratio of fixed assets to long-term liabilities = Fixed assets ÷ Long-term liabilities

                                                                       = 1,200,000 ÷ $1,000,000

   = 1.2

Requirement 11:

Times interest earned = (Income before income tax + Interest expense) ÷ Interest expense

= ($222,700 + $80,000) ÷ $80,000

= 3.8

Requirement 12:

Times preferred dividend earned        = Net Income ÷ Preferred dividends

                                                            = $196,000 ÷ $7,000

= 28.0

Requirement 13:

Asset turnover             = Net sales ÷ Average total assets excluding long-term investments

                                    = $1,314,000 ÷ (($2,323,297 + $1,958,730) ÷ 2)

= 0.6

Requirement 14:

Return on total assets = (Net income + Interest expense) ÷ Average total assets

                                                = ($196,000 + $80,000) ÷ (($2,829,718 + $2,143,255) ÷ 2)

= 11.1%

Requirement 15:

Return on stockholders’ equity           = Net income ÷ Average total stockholders’ equity

= $196,000 ÷ (($1,489,325 + $1,310,675) ÷ 2)

= 14.0%

Requirement 16:

Return on common stockholders’ equity        = (Net income ─ Preferred dividend) ÷ Average common stockholders’ equity

= ($196,000 ─ $7,000) ÷ ($1,289,325 +$1,110,675) ÷ 2)

= 15.8%

Requirement 17:

Earnings per share on common stock = (Net income ─ Preferred dividend) ÷ Shares of common stock outstanding

= ($196,000 ─ $7,000) ÷ ($230,000 ÷ 10)

= $8.22 per share

Requirement 18:

Price-earnings ratio = Market price per common share ÷ Earning per share (common stock)

= $56 ÷ 8.22

= 6.8 times

Requirement 19:

Dividends per share of common stock           = Dividends ÷ Shares of common stock outstanding

= $10,350 ÷ ($230,000 ÷ 10)

= $0.45

Requirement 20:

Dividend yield = Dividends per share ÷ Market price per common share

= $0.45 ÷ $56

= 0.8%