Question

The following data is given for Ink Inc.

Sales	$40 M	LT Bonds	$25 M	Cash & A/R	$8 M
Cash	$5 M	Accts Payable	$4 M	Depreciation	$2 M
Notes Payable	$16 M	Interest Expense	$8 M	Cost of Goods Sold	$20 M
Tax Rate	40%	Inventory	$4 M	# Shares Outstanding	2.4 M
				Net Fixed Assets	$50 M

a. Develop the current income statement for Ink Inc. Be sure to indicate the value of earnings per share (EPS).

b. Develop a balance sheet for Ink Inc. Be sure to include shareholder’s equity.

c. Find the current ratio, profit margin, and asset turnover for Ink Inc.

d. If the industry averages for current ratio, profit margin, and asset turnover are 2.1, 26%, and 35 days respectively, what can you conclude about Ink Inc.’s asset management situation?

e. What additional information would you need to make a thorough evaluation of their asset management situation?

Answer 1

Answer A)
Income Statement of Ink Inc. for FY 20XX - 20XX					(Amounts in $ Millions)
	Expenses	Amount		Income	Amount
	Cost of Goods Sold	20		Sales	40
	Interest Expenses	8		Closing Inventory	4
	Depreciation on FA	2
	Tax Expenses (@ 40%)	4
	Net Profit	10		Net Loss
	Total	44		Total	44
	Tax Calculation
	Sales	40
Less:-
	COGS	20
	Interest Expenses	8
	Depreciation on FA	2
	Taxable Income	10
	Tax Amount @ 40%	4
	EPS Calculation
	Earnings per Share (EPS) = Net Income / No. of Shares Outstanding
	EPS = 10/2.4 = $4.17 per share
Answer B)
Balance Sheet of Ink Inc. for the year ended 20xx - 20xx
		(Amounts in $ Millions)
	Liabilities / Sources of Funds	Amount
	Equity Share Capital	12
	(2.4 M Shares @ $5 each)
	Reserves and Surplus:-
	Income during the year (P&L A/C)	10
	Non Current Liabilities
	Long term Bonds	25
	Current Liabilities
	Accounts Payable	4
	Notes Payable	16
	Total	67
	Assets / Allocation of Funds	Amount
	Long Term Assets
	Net Fixed Assets	50
	Short Term Assets
	Cash Balance	5
	Inventory	4
	Cash and Accounts Receivables	8
	Total	67
Answer C & D)
	Ratio Analysis
1)	Current Ratio
	Current Ratio = Current Assets/ Current Liabilities
	Current Ratio = 17 / 20 = 0.85 t
	Current Ratio Indicates whether co. can Pay its short term liabilities
	Lower Ratio may indicate that co. is having hard time to repay its liabilities
	Ratio of 0.85 Shows Ink Inc. is having hard time to repay its liabilities
2)	Profit Margin ratio
	Profit Margin ratio = Net Profit / Sales
	Profit Margin ratio = 10 / 40 *100 = 25%
	Profit Margin Ratio of 25% as against 26% in market is normal one
	This ratio measures the firms ability to translate sales into earnings for shareholders
3)	Asset Turnover ratio
	Asset Turnover ratio = Net Sales / Avg. Total Assets
	Asset Turnover ratio = 40 / 67 = 0.60 t
	Lower Ratio may indicate that co. is inefficient in using its assets or it has a capital intensive environment
Answer E)
1)	From Asset turnover ration we can make out that capital intensive, hence co. shall payout its LT Bonds
2)	Also that co. shall shall reduce its Inventory level
3)	Co. shall not maintain such large amount of liquid cash. It shall rather invest in some reliable places