Question

Long-term debt ratio	0.1
Times interest earned	8.0
Current ratio	1.2
Quick ratio	1.0
Cash ratio	0.6
Inventory turnover	3.0
Average collection period	73	days

Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

Questions marks are in the places that I do not know the answers to

	INCOME STATEMENT (Figures in $ millions) Net sales $265.00 Cost of goods sold 135.00 Selling, general, and administrative expenses 29.00 Depreciation 39.00 Earnings before interest and taxes (EBIT) $62.00 Interest expense ? Income before tax ? Tax (35% of income before tax) 19.00 Net income ?

BALANCE SHEET (Figures in $ millions) This Year Last Year Assets Cash and marketable securities $48.00 $39 Accounts receivable 32.00 53 Inventories ? 45 Total current assets ? $137 Net property, plant, and equipment ? 44 Total assets $250.00 $181 Liabilities and shareholders’ equity Accounts payable $35.00 $30 Notes payable 45.00 50 Total current liabilities $80.00 $80 Long-term debt ? 16 Shareholders’ equity ? 85 Total liabilities and shareholders’ equity $250.00 $181

Answer 1

Taxes = 35% * Income before tax
$19.00 = 0.35 * Income before tax
Income before tax = $54.29

Income before tax = Earnings before interest and taxes - Interest expense
$54.29 = $62.00 - Interest expense
Interest expense = $7.71

Net income = Income before tax - Tax
Net income = $54.29 - $19.00
Net income = $35.29

Current ratio = Current assets / Current liabilities
1.20 = Current assets / $80.00
Current assets = $96.00

Current assets = Cash and marketable securities + Accounts receivable + Inventories
$96.00 = $48.00 + $32.00 + Inventories
Inventories = $16.00

Total assets = Current assets + Net property, plant and equipment
$250.00 = $96.00 + Net property, plant and equipment
Net property, plant and equipment = $154.00

Long-term debt ratio = Long-term debt / Total assets
0.10 = Long-term debt / $250.00
Long-term debt = $25.00

Total liabilities and shareholders’ equity = Current liabilities + Long-term debt + Shareholders’ equity
$250.00 = $80.00 + $25.00 + Shareholders’ equity
Shareholders’ equity = $145.00

Average shareholders’ equity = (Beginning shareholders’ equity + Ending shareholders’ equity) / 2
Average shareholders’ equity = ($145.00 + $85.00) / 2
Average shareholders’ equity = $115.00

Return on equity = Net income / Average shareholders’ equity
Return on equity = $35.29 / $115.00
Return on equity = 0.3069 or 30.69%