Question

Here are simplified financial statements for Phone Corporation in a recent year: INCOME STATEMENT (Figures in $ millions) Net sales $ 13,000 Cost of goods sold 3,960 Other expenses 4,037 Depreciation 2,458 Earnings before interest and taxes (EBIT) $ 2,545 Interest expense 675 Income before tax $ 1,870 Taxes (at 30%) 561 Net income $ 1,309 Dividends $ 856 BALANCE SHEET (Figures in $ millions) End of Year Start of Year Assets Cash and marketable securities $ 87 $ 156 Receivables 2,282 2,450 Inventories 177 228 Other current assets 857 922 Total current assets $ 3,403 $ 3,756 Net property, plant, and equipment 19,953 19,895 Other long-term assets 4,196 3,750 Total assets $ 27,552 $ 27,401 Liabilities and shareholders’ equity Payables $ 2,544 $ 3,020 Short-term debt 1,409 1,563 Other current liabilities 801 777 Total current liabilities $ 4,754 $ 5,360 Long-term debt and leases 7,516 7,191 Other long-term liabilities 6,158 6,129 Shareholders’ equity 9,124 8,721 Total liabilities and shareholders’ equity $ 27,552 $ 27,401 Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

a.	Return on equity (use average balance sheet figures)	14.67selected answer correct	%
b.	Return on assets (use average balance sheet figures)	9.24selected answer incorrect	%
c.	Return on capital (use average balance sheet figures)	15.29selected answer incorrect	%
d.	Days in inventory (use start-of-year balance sheet figures)	19.00selected answer incorrect	days
e.	Inventory turnover (use start-of-year balance sheet figures)	19.50selected answer incorrect
f.	Average collection period (use start-of-year balance sheet figures)	64.00selected answer incorrect	days
g.	Operating profit margin	1.95selected answer incorrect	%
h.	Long-term debt ratio (use end-of-year balance sheet figures)	27.27selected answer incorrect
i.	Total debt ratio (use end-of-year balance sheet figures)	90.76selected answer incorrect
j.	Times interest earned	3.77selected answer correct
k.	Cash coverage ratio	7.41selected answer correct
l.	Current ratio (use end-of-year balance sheet figures)	71.58selected answer incorrect
m.	Quick ratio (use end-of-year balance sheet figures)	67.86selected answer incorrect

Answer 1

Solution: Calculation of Financial ratios:

(a) Return on Equity = Net Income/Average shareholder's Equity

= 1309/[(9124+8721)/2] = 9.71%

(b) Return on Assets = [Net Income+(1-0.3) Interest Expense]/Average assets

= [1309+(1-0.3)675]/[(27552+27401)/2]

= 6.48%

(c) Return on Capital =[Net Income+(1-0.3) Interest Expense]/[(7516+9124)/2+(7191+8721)/2]

= [1309+(1-0.3)675]/[(7516+9124)/2+(7191+8721)/2]

= 7.54%

(d) Days in inventory = Beginning inventory/(cost of goods sold/365)

= 228/(3960/365) = 21 days

(e) Inventory Turnover = Cost of goods sold/Beginning inventory = 3960/228 = 17.36

(f) Average collection period = Beginning Receivables/(net sales/365)

= 2450/(13000/365) = 68.78 days

(g) Operating profit margin = [Net income+(1-0.3)675]/net sales] = [1309+(1-0.3)675]/13000

= 13.70%

(h) Long-term debt ratio = Closing Long-term debt/(closing long term debt+shareholder's Equity)

= 7516/(7516+9124) = 0.45

(i) Total debt ratio = (total current liabilities+long term debt and leases+other long term liabilities)/total liabilities and shareholder's Equity

= (4754+7516+6158)/27552 = 0.67

(j) Times Interest Earned = EBIT/Interest Expense

= 2545/675 = 3.77

(k) Cash coverage ratio = (Depreciation+EBIT)/Interest Expense

= (2458+2545)/675 = 7.41

(l) Current Ratio = Current assets/Current liabilities

= 3403/4754 = 0.71

(m) Quick ratio = (cash and marketable securities+Receivables)/Total current liabilities

= (87+2282)/4754 = 0.49