Question

The Caughlin Company has a long-term debt ratio of .38 and a current ratio of 1.60. Current liabilities are $940, sales are $6,360, profit margin is 9.7 percent, and ROE is 19.9 percent. What is the amount of the firm’s net fixed assets?

Answer 1

Balance sheet

ASSETS			EQUITIES AND LIABILITIES
PARTICULARS	WORKING NUMBER	AMOUNT	PARTICULARS	WORKING NUMBER	AMOUNT
Equity	ii	3100	Fixed Asset	iv	5012
Non-Current Liability	iii	2476	Current Asset	i	1504
Current Liability	Given	940
		6516			6516

Workings:

     Working i) Current Ratio= Current Asset/ Current Liability

1.60 = Current Asset/940

Current Asset = 1.6*940 = 1504

Working ii) Net Income = Sales * Profit Margin = 6360*9.7% = 616.92

Return on Equity = Net Income / Equity *100

19.9% = 616.92/ Equity * 100

Equity = 616.92/19.9% = 3100

Working iii) Long Term Debt Ratio = Long Term debt/Total Asset

Assuming Total Asset = “z”

0.38 = Long Term debt/ z

Long Term debt = 0.38 z

As per Balance sheet Equation:

Equity + Non-Current Liability+ Current Liability = Total Assets

3100+0.38z + 940 = z

4040 = 1z-0.38z

z = 4040 / 0.62 = 6516

Total Assets = 6516

Non-Current Liability = 6516 * 0.38 = 2476

Working iv) As per Balance sheet Total Asset = Fixed Asset + Current Asset

6516 = Fixed Asset + 1504

Fixed Asset = 6516 – 1504 = 5012