Question

Measures of liquidity, Solvency, and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 70 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			$1,924,000		$1,616,800
Net income			456,000		331,200
Total			$2,380,000		$1,948,000
Dividends:
	On preferred stock		$5,600		$5,600
	On common stock		18,400		18,400
		Total dividends	$24,000		$24,000
Retained earnings, December 31			$2,356,000		$1,924,000

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$2,847,000		$2,623,040
Cost of goods sold	995,720		916,060
Gross profit	$1,851,280		$1,706,980
Selling expenses	$643,570		$795,410
Administrative expenses	548,220		467,140
Total operating expenses	$1,191,790		$1,262,550
Income from operations	$659,490		$444,430
Other revenue	34,710		28,370
	$694,200		$472,800
Other expense (interest)	176,000		96,800
Income before income tax	$518,200		$376,000
Income tax expense	62,200		44,800
Net income	$456,000		$331,200

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			20Y2		20Y1
Assets
Current assets
	Cash		$506,150		$484,600
	Marketable securities		766,070		803,060
	Accounts receivable (net)		489,100		459,900
	Inventories		365,000		277,400
	Prepaid expenses		95,760		96,920
		Total current assets	$2,222,080		$2,121,880
Long-term investments			1,028,320		479,434
Property, plant, and equipment (net)			2,860,000		2,574,000
Total assets			$6,110,400		$5,175,314
Liabilities
Current liabilities			$694,400		$1,181,314
Long-term liabilities:
	Mortgage note payable, 8%		$990,000		$0
	Bonds payable, 8%		1,210,000		1,210,000
		Total long-term liabilities	$2,200,000		$1,210,000
Total liabilities			$2,894,400		$2,391,314
Stockholders' Equity
Preferred $0.70 stock, $50 par			$400,000		$400,000
Common stock, $10 par			460,000		460,000
Retained earnings			2,356,000		1,924,000
Total stockholders' equity			$3,216,000		$2,784,000
Total liabilities and stockholders' equity			$6,110,400		$5,175,314

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. Working capital	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield		%

Answer 1

Calculation of Ratios

Sr no	Ratio	Formula	Calculation	Ratio
1	Working Capital	Current assets-Current Liabilities	$2,222,080-$694,400	$1,527,680
2	Current Ratio	Current Assets/Current Liabilities	$2,222,080/$694,400	3.20
3	Acid Test Ratio	Cash+ Marketable Securities+ Account Receivable/Current Liabiliites	($506,150+$766,070+$489,100)/$694,400	2.54
4	Account Receivable Turnover	Credit sales/ Average Account Receivable	$2,847,000/($489,100+$459,900/2)	6
5	Number of days' sales in inventory	Average Inventory/Cost of goods sold* 365 days	($365,000+$277,400/2)/$995,720*365	117.74 days
6	Ratio of fixed assets to long-term liabilities	Fixed Assets/ Long term Liabiliites]	$2,860,000/$2,200,000	1.30
7	Ratio of liabilities to stockholders' equity	Total Liabiliites/Stockholders Equity	$2,894,400/$3,216,000	0.90
8	Times Interest Earned Ratio	Earnings before Interest & taxes/ Interset Expenses Refer WN 2)	$694,200/$176,000	3.94
9	Assets Turnover	Sales/Average assets	$2,847,000 /(6110400+$5,175,314 )2	0.5
10	Retun on Total assets	Net Income/ Average Total assets	$456,000/($6,110,400+$5,175,314 )2	8.08%
11	Return on stockholders’ equity	Net Income/ Stockholders equity	$456,000/$3,216,000	14.18%
12	Return on common stockholders’ equity	Net income- preference dividend/ (Average stockholders Equity-Average preferred Stockholders equity) Refer WN: 1	($456,000-$5,600)/($3,000,000-$400,000)	17.32%
13	EPS	Net income- preference dividend/ number of common shares outstanding	($456,000-$5,600)/$46,000	$9.79
14	PE ratio	Market price per share/Earnings per share	$70/$9.79	7.15 times
15	Dividends per share of common stock	Dividend paid/ number of common shares outstanding	$18,400/$46,000	$0.40
16	Dividend yield	Dividend per share/Market price per share*100	$0.40/$70*100	0.57%

Working Note1

Average Stockholders Equity =( Opening stockholders Equity+Closing Stockholders equity)/2	($2,784,000+$3,216,000)/2=$3,000,000
Average Preferred stockholders Equity=( Opening preferred stockholders equity+ Closing Preffered stockholders Equity)/2	($400,000+$400,000)/2=$400,000

Working Note 2 EBIT

Sales	$2,847,000
Cost of goods sold	-$995,720
Gross profit	$1,851,280
Selling expenses	-$643,570
Administrative expenses	-$548,220
Income from operations	$659,490
Other revenue	$34,710
Earnings Before Interest & taxes	$694,200
Other expense (interest)	-$176,000
Income before income tax	$518,200
Income tax expense	-$62,200
Net income	$456,000

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