Question

3.   [Financial Statements and Ratios] Bike-With-Us Corporation, a specialty bicycle parts replacement venture, was started last year by two former professional bicycle riders who had substantial competitive racing experience including competing in the Tour de France. The two entrepreneurs borrowed $50,000 from members of their families and each put up $30,000 in equity capital. Retail space was rented and $60,000 was spent for fixtures and store equipment. Following are the abbreviated income statement and balance sheet information for the Bike-With-Us Corporation after one complete year of operation.

BIKE-WITH-US CORPORATION

  

Sales                           $325,000

            Operating Costs          285,000

            Depreciation                   10,000

            Interest                              5,000

            Taxes                                6,000

      Cash                                $1,000

            Receivables                    30,000

            Inventories                      50,000

            Fixed Assets, Net            50,000

            Payables                          11,000

            Accruals                          10,000

            Long-Term Loan            50,000

            Common Equity             60,000

A.     Prepare an income statement and a balance sheet for the Bike-With-Us Corporation using only the information provided above.

B.     Calculate the current ratio, quick ratio, and NWC-to-total-assets ratio.

C.    Calculate the total-debt-to-total-assets ratio, debt-to-equity ratio, and interest coverage.

D.Calculate the net profit margin, sales-to-total-assets ratio, and the return on total assets.

A.     Calculate the equity multiplier. Combine this calculation with the calculations in Part D to show the ROE model with its three components.

Answer 1

A.Ans:

Income Statement of Bike-With-Us Corporation for the period ended 31st December
Particulars		Amount
Sales		3,25,000
Less: operating cost		2,85,000
Gross Profit		40,000
Less: Depreciation		10,000
Operating Profit		30,000
Less: interest		5000
Net Profit Before taxes		25,000
Less: taxes		6,000
Net Income		19,000
Statement of Balance Sheet of Bike-With-Us Corporation, for the period ended 31-december
	Amount ($)		Amount($)
Assets
Non-Current Assets
Property, Plant & Equipment			50,000
			50000
Current Assets
Inventories			50000
Trade Receivables			30000
Cash and cash equivalents			1000
			81000
Total Assets			131000
Equity and Liabilities
Equity
Share Capital			60000
Retained Earnings
Revaluation Reserve
Total Equity			60000
Non-current liabilities
Long-term borrowings			50,000
Current Liabilities
Trade and other payables			11,000
Short-term borrowings
Current portion of long-term borrowings			10000
Total current liabilities			21000
Total liabilities			71000
Total equity and liabilities			131000

B.Ans:

CURRENT RATIO:

Current Assets = Cash + Receivable + Inventories

Current Assets = $1,000 + $30,000 + $50,000

Current Assets = $81,000

Current Liabilities = Payable + Accruals

Current Liabilities = $11,000 + $10,000

Current Liabilities = $21,000

Current Ratio = Current Assets / Current Liabilities

Current Ratio = $81,000 / $21,000

Current Ratio = 3.86

QUICK RATIO:

Quick Assets = Cash + Receivable

Quick Assets = $1,000 + $30,000

Quick Assets = $31,000

Current Liabilities = Payable + Accruals

Current Liabilities = $11,000 + $10,000

Current Liabilities = $21,000

Quick Ratio = Quick Assets / Current Liabilities

Quick Ratio = $31,000 / $21,000

Quick Ratio = 1.48

NWC-TO-TOTAL ASSETS RATIO:

Net Working Capital = Current Assets - Current Liabilities

Net Working Capital = $81,000 - $21,000

Net Working Capital = $60,000

NWC-to-Total Assets Ratio = Net Working Capital / Total Assets

NWC-to-Total Assets Ratio = $60,000 / 131,000

NWC-to-Total Assets Ratio = 0.46

C.Ans:

Total Debt-to-Total Assets Ratio:

Total Debt = Current Liabilities + Long-term Debt

Total Debt = $21,000 + $50,000

Total Debt = $71,000

Total Assets = $131,000

Total Debt-to-Total Assets Ratio = Total Debt / Total Assets

Total Debt-to-Total Assets Ratio = $71,000 / $131,000

Total Debt-to-Total Assets Ratio = 0.54

Debt-to-Equity Ratio:

Total Debt = $71,000

Total Equity = $60,000

Debt-to-Equity Ratio = Debt / Equity

Debt-to-Equity Ratio = $71,000 / $60,000

Debt-to-Equity Ratio = 1.18

Interest Coverage:

Interest Coverage = Operating Income / Interest

Interest Coverage = $30,000 / $5,000

Interest Coverage = 6

D.Ans:

Net Profit Margin = Net Income / Sales

Net Profit Margin = $19,000 / $325,000

Net Profit Margin = 0.0585 = 5.85%

Sales-to-total Assets Ratio = Sales / Total Assets

Sales-to-total Assets Ratio = $325,000 / $131,000

Sales-to-total Assets Ratio = 2.48

Return on Assets = Net Income / Total Assets

Return on Assets = $19,000 / $131,000

Return on Assets = 0.1450 = 14.50%

E.Ans,

Equity Multiplier = Total Assets / Total Equity

Equity Multiplier = $131,000 / $60,000

Equity Multiplier = 2.18

ROE = Net Profit Margin * Sales-to-total Assets Ratio * Equity Multiplier

ROE = 5.85% * 2.48 * 2.18

ROE = 31.63%