Question

In: Accounting

Below are numbers from a balance sheet and income statement. Construct the financial ratios requested below....

Below are numbers from a balance sheet and income statement. Construct the financial ratios
requested below.

Sales 499891
Operating Costs 359935
Depreciation 10000
Interest Expense 5000
Tax Expense 29408
Cash 1000
Receivables 30000
Inventories 59989
Fixed Assets, Net 50000
Payables 11000
Accrued Expenses 10000
Long-Term Loan 50000
Common Equity 69989

6. Interest coverage
7. Net profit margin
8. Sales to total assets (Asset turnover)
9. Return on assets
10. Equity multiplier
11. Return on equity

Solutions

Expert Solution

Calculation of Net profit -

particulars Amt.
sales 499891
less operating cost 359935
less Depriciation 10000
EBIT 129956
less Interest expense 5000
EBT 124956
less Tax Expense 29408
EAT 95548

Where EBIT - Earnings before interest & tax

EBT - Earnings before tax

EAT - earnings after tax

6. Interest coverage ratio - it measures the firm's ability to make contractual interest payment.

interest coverage ratio = EBIT / Interest

= 129956/5000

= 25.99

7. Net profit measures the percentage of each sales $ remaining after all costs and expenses including interest and taxes have been deducted.

Net profit margin = earnings after interest & tax(EAT) / Net sales

= 95548 / 499891

= 19.11%

8. sale to total assets (assets turnover) - it indicates the efficiency with which firm uses all its assets to generate sales.

Assets turnover = Sales / average total assets

= 499891/(50000+1000+30000+59989)

= 499891/140989

= 3.55

Total assets has considered due to non availibility of Average total assets. Total assets consists of (fixed assets + cash + inventory + debtors)

9. Return on assets - It is the overall profitability of a firm, is computed by multiplying net profit margin and assets turnover.

ROA = EAT / Sales * sales / total assets

= 95548 / 140989

= 0.677

10. Equity Multiplier = total assets / stockholder's equity

= 140989 / 69989

= 2.01

11. Return on equity - it measures the return on the owners (both preference and equity shareholders) investment in the firm.

Return on equity = EAT / Average total shareholders equity

= 95548 / 69989 *100

= 137%

Note - Due to non availibility of average total shareholder equity, consider shareholder equity.

Please check with your answer and let me know.

ekkarill92 answered 1 year ago
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