Question

Measures of liquidity, The ability of a company to make its periodic interest payments and repay the face amount of debt at maturity.Solvency and The ability of a firm to generate earnings.Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 56 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			$ 1,265,300		$ 1,075,600
Net income			300,000		220,300
Total			$1,565,300		$ 1,295,900
Dividends:
	On preferred stock		$ 9,800		$ 9,800
	On common stock		20,800		20,800
		Total dividends	$ 30,600		$ 30,600
Retained earnings, December 31			$ 1,534,700		$ 1,265,300

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 1,768,425		$ 1,629,350
Cost of goods sold	613,200		564,140
Gross profit	$ 1,155,225		$ 1,065,210
Selling expenses	$ 387,380		$ 483,710
Administrative expenses	329,995		284,080
Total operating expenses	717,375		767,790
Income from operations	$ 437,850		$ 297,420
Other revenue	23,050		18,980
	$ 460,900		$ 316,400
Other expense (interest)	120,000		66,400
Income before income tax	$ 340,900		$ 250,000
Income tax expense	40,900		29,700
Net income	$ 300,000		$ 220,300

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 288,060		$ 332,730
	Marketable securities		435,980		551,390
	Accounts receivable (net)		321,200		299,300
	Inventories		248,200		189,800
	Prepaid expenses		54,496		66,550
		Total current assets	$ 1,347,936		$ 1,439,770
Long-term investments			757,994		316,868
Property, plant, and equipment (net)			1,950,000		1,755,000
Total assets			$ 4,055,930		$ 3,511,638
Liabilities
Current liabilities			$ 421,230		$ 816,338
Long-term liabilities
	Mortgage note payable, 8 %		$ 670,000		$ 0
	Bonds payable, 8 %		830,000		830,000
		Total long-term liabilities	$ 1,500,000		$ 830,000
Total liabilities			$ 1,921,230		$ 1,646,338
Stockholders' Equity
Preferred $ 0.70 stock, $ 20 par			$ 280,000		$ 280,000
Common stock, $ 10 par			320,000		320,000
Retained earnings			1,534,700		1,265,300
Total stockholders' equity			$ 2,134,700		$ 1,865,300
Total liabilities and stockholders' equity			$ 4,055,930		$ 3,511,638

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. The excess of the current assets of a business over its current liabilities.Working capital	$
2. A financial ratio that is computed by dividing current assets by current liabilities.Current ratio
3. A financial ratio that measures the ability to pay current liabilities with quick assets (cash, temporary investments, accounts receivable), computed as quick assets divided by current liabilities.Quick ratio
4. The relationship between sales and accounts receivable, computed by dividing the sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash.Accounts receivable turnover
5. The relationship between sales and accounts receivable, computed by dividing the average accounts receivable by the average daily sales.Number of days' sales in receivables		days
6. The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory.Inventory turnover
7. The relationship between the volume of sales and inventory, computed by dividing average inventory by the average daily cost of goods sold.Number of days' sales in inventory		days
8. A solvency ratio that measures how much fixed assets a company has to support its long-term debt.Ratio of fixed assets to long-term liabilities
9. A comprehensive leverage ratio that measures the relationship of the claims of creditors to stockholders' equity, calculated as total liabilities divided by total stockholders' equity.Ratio of liabilities to stockholders' equity
10. A ratio that measures the risk that interst payments will not be made if earnings decrease, calculated as income before income tax and interest expense divided by interest expense.Times interest earned
11. Ratio that measures how effectively a business uses its assets to generate revenues, computed as sales divided by average total assets.Asset turnover
12. A measure of the profitability of assets, without regard to the equity of creditors and stockholders in the assets.Return on total assets		%
13. A measure of profitability computed by dividing net income by average stockholders' equity.Return on stockholders’ equity		%
14. A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Return on common stockholders’ equity		%
15. The profitability ratio of net income available to common shareholders to the number of common shares outstanding.Earnings per share on common stock	$
16. The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.Price-earnings ratio
17. Measures the extent to which earnings are being distributed to common shareholders.Dividends per share of common stock	$
18. A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions.Dividend yield		%

Answer 1

1. Working capital = Current assets--current liabilities = 1347936-421230=$ 926706

2. Current ratio= current assets/ current liabilities =1347936/421230= 3.2:1

3. Quick ratio= Current assets--prepaid exp- investory/ current liabilities

Quick assets=1347936-248200-54496= 1045240

Ratio= 1045240/421230=2.48:1

4. Average accounts receivable = opening +closing /2

=(321200+299300)/2= 310250

Account receivable turnover ratio = sales/average accounts receivable

=1768425/310250= 5.7 times

5. No of days sales in receivable =365/ account receivable turnover ratio= 64 days

6. Average inventory =( 248200+189800)/2=219000

Inventory turnover ratio= cost of goods sold/average inventory = 613200/219000= 2.8times

7. No of days sale in inventory =365/inventory turnover ratio=130 days

8. Fixed assets/ long term liability = 1950000/1500000= 1.3

9. Total liability /equity = 1921230/2134700=0.9

10. Times interest earned = Earnings before intt and taxes/intt

=460900/120000= 3.84 times

11. Average total assets= (4055930+3511638) /2= 3783784

Asset turnover ratio= sales /average total assets

=1768425/3783784=0.47

12. Return on total assets= earnings before intt and taxes/ total net assets=460900/4055930*100= 11.36%

13. Average equity =2134700+1865300/2=2000000

Return on equity= net income/ average equity =300000/2000000*100=15%

14. Return on common stockholders equity =net income - pref dividend /avg common stockhoders equity

=300000-196000/320000=32.5%

15. EPS= earning /no. Of shares=300000/32000= 9.375 per share

16. Price to earning ratio= market price/eps= 5.97

17. Dividend per share=300000-196000= 104000/32000=3.25 per share

18. Dividend yield = DPS/MPS= 3.25/56*100= 5.80%

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