Question

Here are simplified financial statements for Phone Corporation in a recent year:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	12,700
Cost of goods sold		3,810
Other expenses		4,112
Depreciation		2,368
Earnings before interest and taxes (EBIT)	$	2,410
Interest expense		660
Income before tax	$	1,750
Taxes (at 30%)		525
Net income	$	1,225
Dividends	$	826

  

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	84			$	153
Receivables		2,132				2,390
Inventories		162				213
Other current assets		842				907
Total current assets	$	3,220			$	3,663
Net property, plant, and equipment		19,923				19,865
Other long-term assets		4,166				3,720
Total assets	$	27,309			$	27,248
Liabilities and shareholders’ equity
Payables	$	2,514			$	2,990
Short-term debt		1,394				1,548
Other current liabilities		786				762
Total current liabilities	$	4,694			$	5,300
Long-term debt and leases		8,263				7,728
Other long-term liabilities		6,128				6,099
Shareholders’ equity		8,224				8,121
Total liabilities and shareholders’ equity	$	27,309			$	27,248

Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

I. Total debt ratio

J. Times interest earned

K. Cash coverage ratio

L. Current ratio

M. Quick ratio

Answer 1

Answer i.

Total debt = Current liabilities + Long-term debt and leases + Other long-term liabilities
Total debt = $4,694 + $8,263 + $6,128
Total debt = $19,085

Total debt ratio = Total debt / Total assets
Total debt ratio = $19,085 / $27,309
Total debt ratio = 0.70

Answer j.

Times interest earned = Earnings before interest and taxes / Interest expense
Times interest earned = $2,410 / $660
Times interest earned = 3.65

Answer k.

Cash coverage ratio = (Earnings before interest and taxes + Depreciation) / Interest expense
Cash coverage ratio = ($2,410 + $2,368) / $660
Cash coverage ratio = 7.24

Answer l.

Current ratio = Current assets / Current liabilities
Current ratio = $3,220 / $4,694
Current ratio = 0.69

Answer m.

Quick ratio = (Cash and marketable securities + Receivables) / Current liabilities
Quick ratio = ($84 + $2,132) / $4,694
Quick ratio = 0.47