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In: Finance

THERMO COMPANY BALANCE SHEET DECEMBER 31, 1993 Cash                                 &nbsp

THERMO COMPANY

BALANCE SHEET

DECEMBER 31, 1993

Cash                                        $ 40,000            Current Liabilities                           $   80,000

Accounts Receivable (net)         80,000            10% Bonds Payable                        120,000

Inventory                                   130,000            Common Stock                                  200,000

Plant and Equipment (Net)        250,000            Retained Earnings                            100,000

                                                                            Total Liabilities and

Total Assets                            $500,000                Stockholder’s Equity                    $500,000

Net sales for 1993 were $800,000, gross profit was $320,000, and net income was $36,000. The income tax rate was 40%. A year ago accounts receivable (net) were $76,000, inventory was $110,000, and common stockholders’ equity was $260,000. The bonds payable were out-standing all year and 1993 interest expense was 12,000.

The current ratio of Thermo Company at 12/31/93, calculated from the above data, was 3.13, and the working capital was $170,000. If the firm paid $20,000 of its current liabilities, immediately after this transaction,

Both the current ratio and the working capital would decrease.

Both the current ratio and the working capital would increase.

The current ratio would increase, but the working capital would remain the same.

The current ratio would increase, but the working capital would decrease.

The firm’s inventory turnover for the year was

6.67

4

6

3.69

The firm’s return on common stockholder’s equity was

25.7%

12.9%

17.1%

21.4%

The firm’s average collection period for receivables was

36.5 days

37.4 days

35.6 days

18.3 days

The firm’s times interest earned ratio for the year was

4

3

5

6

Solutions

Expert Solution

Answer 1:

If the firm paid $20,000 of its current liabilities, immediately after this transaction,

Correct choice is:

The current ratio would increase, but the working capital would remain the same.

Explanation

The transaction reduces cash/current assets and reduces current liability by the same amount of $20,000; as such working capital remains same.

Since current ratio is 3.13 which is greater than1, a decrease by equal amount of both current assets and current liability will increase current ratio.

Calculations are given below:

Current assets = ($40,000 - $20,000) + $80,000 + $130,000 = $230,000

Current Liability = $80,000 - $20,000 = $60,000

As such working capital =  $230,000 - $60,000 = $170,000

Current ratio = Current asset / current liability = $230,000 / $60,000 =3.83

Answer 2:

The firm's inventory turnover for the year is:

Correct choice is: 4

Inventory turnover = Cost of goods sold / average inventory

= (sales - gross profit) / average inventory

= ($800,000 -$320,000) / [($110,000 + $130,000)/2]

=4  

Answer 3:

The firm’s return on common stockholder’s equity was:

Correct choice is: 12.9%

Return on common equity =  Net Income / Average Common Stockholder’s Equity

= $36,000 /[($260,000 + $300,000)/2]

=12.9%

Answer 4:

The firm’s average collection period for receivables was

Correct choice is: 35.6 Days

Average receivable turnover = Credit sales / average receivable = $800,000 / [($76,000 + $80,000)/2] = 10.26

Average collection period = 365 days / Average receivable turnover

= 365 /10.26 = 35.6

Answer 5:

The firm’s times interest earned ratio for the year was:

Correct choice is; 6

Times interest earned ratio = EBIT / Interest expense

Given:

10% Bonds payable = $120,000

Interest expense = $120,000 * 10% = $12,000

Net income = $36,000

Tax rate =40%

Earnings before tax = $36,000/ (1 - 40%) = $60,000

EBIT = Earnings before tax + Interest expense = $60,000 + $12,000 = $72,000   

Times interest earned ratio = $72,000 /$12,000 = 6


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