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 $ 66 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			$ 1,944,100		$ 1,651,900
Net income			438,000		338,400
Total			$ 2,382,100		$ 1,990,300
Dividends
	On preferred stock		$ 14,000		$ 14,000
	On common stock		32,200		32,200
		Total dividends	$ 46,200		$ 46,200
Retained earnings, December 31			$ 2,335,900		$ 1,944,100

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 2,847,000		$ 2,623,040
Cost of goods sold	995,720		916,060
Gross profit	$ 1,851,280		$ 1,706,980
Selling expenses	$ 654,090		$ 790,080
Administrative expenses	557,180		464,010
Total operating expenses	1,211,270		1,254,090
Income from operations	$ 640,010		$ 452,890
Other income	33,690		28,910
	$ 673,700		$ 481,800
Other expense (interest)	176,000		96,800
Income before income tax	$ 497,700		$ 385,000
Income tax expense	59,700		46,600
Net income	$ 438,000		$ 338,400

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 484,730		$ 472,560
	Marketable securities		733,650		783,110
	Accounts receivable (net)		489,100		459,900
	Inventories		365,000		277,400
	Prepaid expenses		91,712		94,510
		Total current assets	$ 2,164,192		$ 2,087,480
Long-term investments			1,488,018		825,946
Property, plant, and equipment (net)			2,420,000		2,178,000
Total assets			$ 6,072,210		$ 5,091,426
Liabilities
Current liabilities			$ 676,310		$ 1,077,326
Long-term liabilities
	Mortgage note payable, 8 %		$ 990,000		$ 0
	Bonds payable, 8 %		1,210,000		1,210,000
		Total long-term liabilities	$ 2,200,000		$ 1,210,000
Total liabilities			$ 2,876,310		$ 2,287,326
Stockholders' Equity
Preferred $ 0.70 stock, $ 20 par			$ 400,000		$ 400,000
Common stock, $ 10 par			460,000		460,000
Retained earnings			2,335,900		1,944,100
	Total stockholders' equity		$ 3,195,900		$ 2,804,100
Total liabilities and stockholders' equity			$ 6,072,210		$ 5,091,426

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	$	1487882
2. Current ratio		3.2
3. Quick ratio		2.5
4. Accounts receivable turnover		6
5. Number of days' sales in receivables		60.8 days
6. Inventory turnover		3.1
7. Number of days' sales in inventory		117.7 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

8. Ratio of fixed assets to long-term liabilities = Fixed assets / long term debts = 2420000 / 2,200,000 = 1.1 times

9. Ratio of liabilities to stockholders' equity = Total liabilities / Stockholder's equity = 2876310 / 3195900 = 0.9 : 1

10. Income before interest and tax = Income before tax + interest exp = 497700 + 176000 = 673700

Times interest earned = EBIT / Interest expense = 673700 / 176000 = 3.8 times

11. Avg total assets = (6072210+5091426) / 2 = 5581818

Asset turnover = Net sales / Avg total sales = 2847000/5581818= 0.51

12. Return on total assets = EBIT / Total assets = (673700 / 6072210) * 100 = 11.094%

13. Return on stockholders equity = Net Income / Shareholder's equity = (438000 / 3195900) * 100 = 10.1%

14. Average common equity = (2795900+2404100) / 2 = 2600000

Return on common stockholders equity = [(Net Income - Preferred dividends) / Avg common equity] *100 = [(438000 - 14000) / 2600000] *100 = 16.3%

15. Earning available to common stockholder = Net income - Preferred dividends = 438000 - 14000 = 424000

Outstanding common stock = 460000/10 = 46000

Earnings per share on common stock = 424000 / 46000 = 9.21

16. Market value per share = $66

Price-earnings ratio = Market value per share / EPS = 66 / 9.21 = 7.166

17. Dividends per share of common stock = Divdends paid out over the year / Shares outstanding = 32200/46000 = 0.7

18. Dividend yield = Dividend per share / Market price per share = (0.7/66)*100 = 1.06%