Question

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets				2010
Cash and securities				$1,290
Accounts receivable				9,890
Inventories				13,760
Total current assets				$24,940
Net plant and equipment				$18,060
Total assets				$43,000
Liabilities and Equity
Accounts payable				$8,170
Notes payable				6,020
Accruals				4,730
Total current liabilities				$18,920
Long-term bonds				$8,815
Total debt				$27,735
Common stock				$5,805
Retained earnings				9,460
Total common equity				$15,265
Total liabilities and equity				$43,000
Income Statement (Millions of $)				2010
Net sales				$51,600
Operating costs except depreciation				48,246
Depreciation				903
Earnings bef interest and taxes (EBIT)				$2,451
Less interest				927
Earnings before taxes (EBT)				$1,524
Taxes				533
Net income				$990
Other data:
Shares outstanding (millions)				500.00
Common dividends (millions of $)				$346.67
Int rate on notes payable & L-T bonds				6.25%
Federal plus state income tax rate				35%
Year-end stock price				$23.77
A)   What is the firm's debt/assets ratio? a. 76.11% b. 64.50% c. 49.67% d. 65.15% e. 78.05%

B)

What is the firm's ROE?

	a.	5.77%
	b.	6.49%
	c.	6.94%
	d.	6.16%
	e.	7.92%

C)

What is the firm's quick ratio?

	a.	0.60
	b.	0.73
	c.	0.46
	d.	0.57
	e.	0.59

D)

What is the firm's TIE?

	a.	2.80
	b.	2.56
	c.	2.64
	d.	2.70
	e.	2.62

Answer 1

A) Debt/Assets Ratio

Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets.

Total debt = $27,735

Total Assets = $43,000

Debt to Assets Ratio = 27,735/43,000 = 0.645 = 64.5%. Answer Option b

B) ROE

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity.

Return on Equity = Net Income/Shareholder's Equity

Net Income = $990

Total Shareholders’ equity = $15,265

ROE = 990/15265 = 6.49%. Answer Option b

C) Firm’s Quick Ratio

The quick ratio is an indicator of a company’s short-term liquidity, and measures a company’s ability to meet its short-term obligations with its most liquid assets.

Quick ratio = (current assets – inventories) / current liabilities

Current Assets = $24,940

Inventories = $13,760

Current liabilities = $18,920

Quick ratio = ($24,940 - $13,760)/$18,920 = 0.5909. Answer Option e

D) Times Interest Earned (TIE)

TIE indicates how many times a company can cover its interest charges on a pretax earnings basis.

TIE = EBIT/Annual interest expense

EBIT = $2,451

Interest = $927

TIE = $2,451/$927 = 2.64. Answer Option c