Question

Compute and Interpret Liquidity, Solvency and Coverage Ratios
Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.

Income Statement
Year Ended December 31 (In millions)	2005	2004	2003
Net sales
Products	$ 31,518	$ 30,202	$ 27,290
Service	5,695	5,324	4,534
	37,213	35,526	31,824
Cost of sales
Products	27,882	27,637	25,306
Service	5,073	4,765	4,099
Unallocated coporate costs	803	914	443
	33,758	33,316	29,848
	3,455	2,210	1,976
Other income (expenses), net	(449)	(121)	43
Operating profit	3,006	2,089	2,019
Interest expense	370	425	487
Earnings before taxes	2,636	1,664	1,532
Income tax expense	811	398	479
Net earnings	$ 1,825	$ 1,266	$ 1,053

Balance Sheet
December 31 (In millions)	2005	2004
Assets
Cash and cash equivalents	$ 2,164	$ 780
Short-term investments	429	396
Receivables	4,579	4,094
Inventories	1,921	1,864
Deferred income taxes	861	982
Other current assets	495	557
Total current assets	10,449	8,673
Property, plant and equipment, net	3,924	3,599
Investments in equity securities	196	812
Goodwill	8,447	7,892
Purchased intangibles, net	560	672
Prepaid pension asset	1,360	1,030
Other assets	2,728	2,596
Total assets	$ 27,664	$ 25,274
Liabilities and stockholders' equity
Accounts payable	$ 1,998	$ 1,726
Customer advances and amounts in excess of costs incurred	4,331	4,028
Salaries, benefits and payroll taxes	1,475	1,346
Current maturities of long-term debt	202	15
Other current liabilities	1,422	1,451
Total current liabilities	9,428	8,566
Long-term debt	4,664	5,264
Accrued pension liabilities	2,097	1,300
Other postretirement benefit liabilities	1,277	1,236
Other liabilities	2,331	1,887
Stockholders' equity
Common stock, $1 par value per share	432	438
Additional paid-in capital	1,724	2,223
Retained earnings	7,278	5,915
Accumulated other comprehensive loss	(1,553)	(1,532)
Other	(14)	(23)
Total stockholders' equity	7,867	7,021
Total liabilities and stockholders' equity	$ 27,664	$ 25,274

Consolidated Statement of Cash Flows
Year Ended December 31 (In millions)	2005	2004	2003
Operating Activities
Net earnings	$ 1,825	$ 1,266	$ 1,053
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	555	511	480
Amortization of purchased intangibles	150	145	129
Deferred federal income taxes	24	(58)	467
Changes in operating assets and liabilities:
Receivables	(390)	(87)	(258)
Inventories	(39)	519	(94)
Accounts payable	239	288	330
Customer advances and amounts in excess of costs incurred	296	(228)	(285)
Other	534	568	(13)
Net cash provided by operating activities	3,194	2,924	1,809
Investing Activities
Expenditures for property, plant and equipment	(865)	(769)	(687)
Acquisition of business/investments in affiliated companies	(84)	(91)	(821)
Proceeds from divestiture of businesses/Investments in affiliated companies	935	279	234
Purchase of short-term investments, net	(33)	(156)	(240)
Other	28	29	53
Net cash used for investing activities	(19)	(708)	(1,461)
Financing Activities
repayment of long-term debt	(413)	(1,369)	(2,202)
Issuances of long-term debt	--	--	1,000
Long-term debt repayment and issuance costs	(12)	(163)	(175)
Issuances of common stock	406	164	44
Repurchases of common stock	(1,310)	(673)	(482)
Common stock dividends	(462)	(405)	(261)
Net cash used for financing activities	(1,791)	(2,446)	(2,076)
Net increase (decrease) in cash and cash equivalents	1,384	(230)	(1,728)
Cash and cash equivalents at beginning of year	780	1,010	2,738
Cash and cash equivalents at end of year	$ 2,164	$ 780	$ 1,010

(a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.)
2005 current ratio = Answer

2004 current ratio = Answer

2005 quick ratio = Answer

2004 quick ratio = Answer

(b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places.)
2005 total liabilities-to-stockholders' equity = Answer

2004 total liabilities-to-stockholders' equity = Answer

2005 total debt-to-equity = Answer

2004 total debt-to-equity = Answer

(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. (Round your answers to two decimal places.)
2005 times interest earned = Answer

2004 times interest earned = Answer

2005 cash from operations to total debt = Answer

2004 cash from operations to total debt = Answer

2005 free operating cash flow to total debt = Answer

2004 free operating cash flow to total debt = Answer

Answer 1

A. Computation of Current Ratio and quick ratio for 2005 and 2004

Current Ratio = Current Assets / Current Liabilities

	2005	2004
Total current assets	10,449	8.673
Total Current Liabilities	9,428	8,566
Current Ratio	=10449/9428	=8673/8566
	=1.11 : 1	=1.01 : 1

               

Quick Ratio = Quick Assets / Current Liabilities

Quick Assets = Current Assets – Inventory – Deffered Tax Assets

	2005	2004
Total current assets	10,449	8.673
Total Current Liabilities	9,428	8,566
Inventory	1,961	1,824
Deferred income taxes	861	982
(i) Quick Assets	=10,449-1961-861	=8673-1824-982
	=7627	=5867
(ii) Quick Ratio	=7627/9428	=5867/8566
	=0.81 : 1	=0.68:1

B. Computation of Total Liabilities to Stock holders’ equity ratio and Total debt to Stockholers’ equity ratio

Total liabilities to Stockholders’ equity ratio = Total Liabilities / Stock holders’ equity

Total liabilities = Total liabilities and stock holders’ equity – stock holders’ equity

	2005	2004
Total liabilities and Stockholders’ equity	27,664	25,274
Stock holders’ equity	7,867	7,021
Total liabilities	=27,664-7,867	=25274-7021
	=19,797	=18,253
Total liabilities to stockholders’ equity ratio	=19797/7867	=18253/7021
	=2.52 : 1	=2.60:1

Total Debt to stockholders’ equity ratio = Total Debt / Stockholders equity

Total Debt = Long Term Debt

	2005	2004
Long Term Debt	4,664	5,264
Stock holders’ equity	7,867	7,021
Total Debt to Stockholders’ equity	=4664/7867	=5264/7021
	=0.59 : 1	=0.75 : 1

C. Computation of Interest Earned Ratio

Interest Earned Ratio= Net Profit Before Interest, Taxes and Dividend / Total Interest Expense

(this ratio tells how many times interest expense is covered by Net Profit )

	2005	2004
Net profit before interest, taxes and dividend (operating profit)	3,006	2,089
Interest expense	370	425
Interest earned ratio	=3006/370	=2089/425
	8.12 times	4.92 times