Question

Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2017, were inventory, $48,900; total assets, $199,400; common stock, $82,000; and retained earnings, $33,888.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2018
Sales	$	450,600
Cost of goods sold		298,050
Gross profit		152,550
Operating expenses		99,300
Interest expense		4,500
Income before taxes		48,750
Income tax expense		19,638
Net income	$	29,112

CABOT CORPORATION Balance Sheet December 31, 2018
Assets				Liabilities and Equity
Cash	$	10,000		Accounts payable	$	17,500
Short-term investments		9,000		Accrued wages payable		4,600
Accounts receivable, net		34,000		Income taxes payable		4,500
Merchandise inventory		34,150		Long-term note payable, secured by mortgage on plant assets		66,400
Prepaid expenses		2,550		Common stock		82,000
Plant assets, net		148,300		Retained earnings		63,000
Total assets	$	238,000		Total liabilities and equity	$	238,000

Compute the debt-to-equity ratio.

	(6) Debt-to-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-to-Equity Ratio / = Debt-to-equity ratio 2018: / = 0 to 1

Compute the times interest earned.

	(7) Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned + / = Times interest earned 2018: + / = 0 times

Compute the profit margin ratio.

	(8) Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit margin ratio / = Profit margin ratio 2018: / = 0 %

Answer 1

Solution

(6) Debt to Equity Ratio

Debt to Equity Ratio = Total Liabilities / Total equity

= 93,000 / 145,000

= 0.64

This ratio means that out of one Dollar 0.64 is contributed by owner and balance $ 0.36 is only financed by Debts.

Total Liabilities = Accounts Payable + Acrued wages payable +Income Tax payable + Long term notes Payable

= 17500 +4600+4500+66400

= 93,000

Total Equity = Common Stock + Retained Earnings

= 82000+63000

= 145,000

(7) Times Interest Earned

Times Interest Earned = Income Before interest and Income Tax / Interest expense

= 53250 / 4500

= 11.83   

Income Before Interest & Income Tax = Net Profit + Income tax Expense + Interest Expense

= 29112+19638+4500

= 53,258

(8) Profit Margin Ratio

Profit Margin Ratio = Revenue - Operating Expense -Interest Expense - Income Tax / Revenue

= (450,600 - 99,300 - 4500-19638) / 450,600 x 100

= 327162/ 450600 x 100

= 72.61 %