Question

QUESTION 1

Based on the information in Table 4-2, and assuming the company's stock price is $50 per share, the M/B ratio is

Table 4-2

Drummond Company

Balance Sheet

Assets:
Cash and marketable securities	$400,000
Accounts receivable	1,415,000
Inventories	1,847,500
Prepaid expenses	24,000
Total current assets	3,686,500
Fixed assets	2,800,000
Less: accum. depr.	(1,087,500)
Net fixed assets	1,712,500
Total assets	$5,399,000
Liabilities:
Accounts payable	$600,000
Notes payable	875,000
Accrued taxes	92,000
Total current liabilities	$1,567,000
Long-term debt	900,000
Common Stock (100,000 shares)	700,000
Retained Earnings	2,232,000
Total liabilities and owner's equity	$5,399,000
Income Statement
Net sales (all credit)	$6,375,000
Less: Cost of goods sold	(4,375,000)
Selling and administrative expense	(1,000,000)
Depreciation expense	(135,000)
Interest expense	(100,000)
Earnings before taxes	$765,000
Income taxes	(306,000)
Net income	$459,000

		10.89.
		1.71
		2.44
		1.50

QUESTION 2
Based on the information in Table 4-2, the Debt Ratio is

		46.69%
		40.24%
		32.88%
		30.33%

QUESTION 3

Based on the information in Table 4-2, the acid-test ratio is

		1.17.
		1.33.
		1.39
		2.15

QUESTION 4

Based on the information in Table 4-2, the return on equity is

		19.33%
		18.47%
		16.66%
		15.65%

Answer 1

Ans. 1	Option 2nd 1.71
	Market to book ratio =   Market price per share / Book value per share
		$50 / $29.32
		1.71
	*Book value per share =   (Common stock + Retained earnings) / no. of shares outstanding
		($700,000 + $2,232,000) / 100,000
		$2,932,000 / 100,000
		$29.32	per share
	*Sum of common stock and retained earnings is known as total stockholder's equity.
Ans. 2	The given options are not correct.
	Correct answer would be 45.69%.
	Debt ratio =   (Current liabilities + long term debt) / Total assets * 100
		($1,567,000 + $900,000) / $5,399,000 * 100
		$2,467,000 / $5,399,000 * 100
		45.69%
Ans. 3	The correct answer would be      1.16.
	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
		($3,686,500 - $1,847,500 - $24,000) / $1,567,000
		$1,815,000 / $1,567,000
		1.16
Ans. 4	Option 4th     15.65%
	Return on equity = Net income / Total stockholder's equity * 100
		$459,000 / $2,932,000 * 100
		15.65%
	*Total stockholder's equity = Common stock + Retained earnings
		$700,000 + $2,232,000
		$2,932,000