Question

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 57 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			$ 1,662,900		$ 1,409,300
Net income			369,200		288,600
Total			$ 1,962,100		$ 1,697,900
Dividends
	On preferred stock		$ 6,300		$ 6,300
	On common stock		28,700		28,700
		Total dividends	$ 35,000		$ 35,000
Retained earnings, December 31			$ 1,997,100		$ 1,662,900

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 2,108,970		$ 1,943,050
Cost of goods sold	792,050		728,690
Gross profit	$ 1,316,920		$ 1,214,360
Selling expenses	$ 426,170		$ 526,270
Administrative expenses	363,030		309,080
Total operating expenses	789,200		835,350
Income from operations	$ 527,720		$ 379,010
Other income	27,780		24,190
	$ 555,500		$ 403,200
Other expense (interest)	136,000		75,200
Income before income tax	$ 419,500		$ 328,000
Income tax expense	50,300		39,400
Net income	$ 369,200		$ 288,600

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 313,590		$ 358,870
	Marketable securities		474,620		594,690
	Accounts receivable (net)		401,500		379,600
	Inventories		292,000		219,000
	Prepaid expenses		59,330		71,770
		Total current assets	$ 1,541,040		$ 1,623,930
Long-term investments			1,569,740		653,883
Property, plant, and equipment (net)			1,870,000		1,683,000
Total assets			$ 4,980,780		$ 3,960,813
Liabilities
Current liabilities			$ 513,680		$ 587,913
Long-term liabilities
	Mortgage note payable, 8 %		$ 760,000		$ 0
	Bonds payable, 8 %		940,000		940,000
		Total long-term liabilities	$ 1,700,000		$ 940,000
Total liabilities			$ 2,213,680		$ 1,527,913
Stockholders' Equity
Preferred $ 0.70 stock, $ 40 par			$ 360,000		$ 360,000
Common stock, $ 10 par			410,000		410,000
Retained earnings			1,997,100		1,662,900
	Total stockholders' equity		$ 2,767,100		$ 2,432,900
Total liabilities and stockholders' equity			$ 4,980,780		$ 3,960,813

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

1. Working capital = Current Assets - Current Liabilities

= 1541040 - 513680 = 1027360

2. Current Ratio = Current assets / Current Liabilities

= 1541040 / 513680 = 3:1

3. Quick Ratio = (Current Assets - Prepaid expenses - Inventory) / Current liabilities

= (1541040 - 59330 - 292000) / 513680

= 1189710 / 513680

= 2.3 / 1

4. Accounts Receivable Turnover = Net Credit Sales / Average Accounts receivable

= [Net Credit Sales / {(Opening Accounts receivable + closing accounts receivable)/2}]

= [2108970 / {(379600 + 401500)/2}]

= 2108970 / 390550

= 5.4

(All sales have been considered to have been made on credit)

5. Number of days sales in receivables = 365 / Receivables turnover ratio

= 365 / 5.4

= 68 Days

6. Inventory Turnover Ratio = Net Sales / Average Inventory

= [Net Sales / {(Opening inventory + closing accounts inventory)/2}]

= [2108970 / {(219000 + 292000)/2}]

= [2108970 / 255500]

= 8.3

7. Number of days sales in inventory = 365 / Inventory turnover ratio

= 365 / 8.3

= 44 days

8. Fixed assets to long term liability = Fixed Assets / Long term liabilities

= (Property, Plant & equipment) / long term liability

= (1870000 / 1700000)

= 1.1

9. Total liabilities to stockholders equity = Total liability / total stockholders equity

= 2213680 / 2767100

= 0.8

10. Times interest earned = Net Income before interest and tax / Interest expense

= 419500 / 136000

= 3.1

11. Asset turnover ratio = Net Sales / Total Assets

= 2108970 / 4980780

= 0.4

12. Return on total assets = (Net income / Total assets)*100

= (369200 / 4980780)*100

= 7.4%

13. Return on shareholder's equity = (Net Income / Total shareholder's equity)*100

= (369200/2767100)*100

= 13.3%

14. Return on common stockholder's equity = Net Income/Common Stock * 100

= 369200/410000*100

= 90%

15. Earning per share = EPS/Common Stock

= (Net Income/Total shares)

= (369200/41000)

= $9

16. Price Earning Ratio = Price / EPS

= 57/9

= 6.3:1

17. Dividend per share = (Net income - retained earnings) / Number of shares

= (369200-334200) / 41000

= 0.85

Note - Difference in retained earnings of 2 years = 334200

18. Dividend Yield = Dividend per Share/ Market price*100

= 0.85 / 57 * 100

= 1.5%