Question

The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .39 and a current ratio of 1.7. Current liabilities are $950, sales are $6,370, profit margin is 9.8 percent, and ROE is 20 percent. What is the amount of the firm’s net fixed assets? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

• All working forms part of the answer
• Follow all the 5 steps.
• Step1: Calculate Total Equity

A	Sales	$             6,370.00
B	Profit Margin	9.80%
C = A x B	Net Income	$                624.26
D	ROE	20%
E = C/D	Total Equity	$             3,121.30

• Step 2: Calculate value of ‘long term debt ‘

The ratio of long term debts to ‘long term debts + Equity’ given is 0.39.

Let the value of Long Term Debt be ‘a’, then

0.39 = a/(a + 3121.30)

0.39 x (a + 3121.30) = a

0.39a + 1217.307 = a

1217.307 = a – 0.39a

1217.307 = 0.61a

a=1217.307/0.61

a= $ 1995.59 = Total Long Term Debts

• Step 3: Calculate total ASSETS

Total Assets = Total Equity + Total Long Term Debts + Total Current Liabilities

= 3121.30 + 1995.59 + 950

= $ 6,066.89

• Step 4: Calculate value of Current Assets

A	Current Liabilities	$                950.00
B	Current ratio	1.7
C = A x B	Current Assets	$             1,615.00

• Step 5: ANSWER: Calculation of Net Fixed Assets

Total Assets = Net Fixed Assets + Current Assets

Hence, Total Assets – Current Assets = Net Fixed Assets

6066.89 – 1615 = $ 4,451.89

• Answer = $ 4,451.89