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 $ 65 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			$ 1,163,475		$ 982,725
Net income			273,600		201,300
Total			$ 1,395,975		$ 1,184,025
Dividends
	On preferred stock		$ 8,400		$ 8,400
	On common stock		12,150		12,150
		Total dividends	$ 20,550		$ 20,550
Retained earnings, December 31			$ 1,416,525		$ 1,163,475

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 1,644,325		$ 1,514,960
Cost of goods sold	635,100		584,290
Gross profit	$ 1,009,225		$ 930,670
Selling expenses	$ 319,830		$ 409,010
Administrative expenses	272,445		240,220
Total operating expenses	592,275		649,230
Income from operations	$ 416,950		$ 281,440
Other income	21,950		17,960
	$ 438,900		$ 299,400
Other expense (interest)	128,000		70,400
Income before income tax	$ 310,900		$ 229,000
Income tax expense	37,300		27,700
Net income	$ 273,600		$ 201,300

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 346,400		$ 259,300
	Marketable securities		524,280		429,700
	Accounts receivable (net)		321,200		299,300
	Inventories		248,200		189,800
	Prepaid expenses		65,536		51,860
		Total current assets	$ 1,505,616		$ 1,229,960
Long-term investments			620,087		41,951
Property, plant, and equipment (net)			1,920,000		1,728,000
Total assets			$ 4,045,703		$ 2,999,911
Liabilities
Current liabilities			$ 519,178		$ 446,436
Long-term liabilities
	Mortgage note payable, 8 %		$ 720,000		$ 0
	Bonds payable, 8 %		880,000		880,000
		Total long-term liabilities	$ 1,600,000		$ 880,000
Total liabilities			$ 2,119,178		$ 1,326,436
Stockholders' Equity
Preferred $ 0.70 stock, $ 20 par			$ 240,000		$ 240,000
Common stock, $ 10 par			270,000		270,000
Retained earnings			1,416,525		1,163,475
	Total stockholders' equity		$ 1,926,525		$ 1,673,475
Total liabilities and stockholders' equity			$ 4,045,703		$ 2,999,911

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	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		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

1. Working Capital = Current Assets - Current Liabilities

Current Assets = $ 1505616

Current Liabilities = $ 519178

Working Capital = $ 986438

2. Current Ratio = Current assets/ Current Liabilities

= 1505616/519178

= 2.90:1

3. Quick Ratio = Liquid Assets/Current Liabilities

Liquid/Quick Assets :-

Cash = $ 346400

Marketable Securities = $524280

Accounts Receivables = $321200

TOTAL = $ 1191880

=1191880/519178

= 2.3:1

4. Account Receivables Turnover ratio = Net Credit Sales/ Average Account Receivables

Net Credit Sales = 1644325 (Assume all sales are in credit) Average Debtor = Opening Debtor+Closing Debtor/2

= 321200+299300/2

= 310250

= 1644325/310250

= 5.3:1

5. No. of Days sales in receivables :-

Average Debtor/Credit Sales * 365

= 310250/1644325*365

= 69 Days

6. Inventory turnover ratio = Cost of Goods Sold/ Average Inventory

Cost of Goods Sold = 635100

Average Inventory = Opening Inventory + Closing Inventory/2

Opening Inventory = 189800

Closing Inventory = 248200

Average Inventory = 219000

Inventory Ratio = 635100/219000

= 2.9 Times

7. No. of Days sales in inventory = No. of days in a year/Inventory Turnover Ratio

= 365/2.9

= 126 Days

8. Ratio of fixed assets to long term liabilities = Fixed Assets / Long Term Liabilities

Fixed Assets = $ 1920000

Long term Liabilities = $ 1600000

Ratio = 1920000/1600000

= 1.2:1

9. Ratio of liabilities to stockholder's equity/Debt Equity Ratio

= Debt/ Equity

Debt = 1600000

Equity = 1926525

Ratio = 1600000/1926525

= 0.831:1

10. Times Interest Earned = EBIT/Interest

EBIT = 438900

Interest = 128000

Ratio = 438900/128000

= 3.43 Times

11. Asset Turnover Ratio = Net Sales / Average Total Assets

Net Sales = 1644325

Average Total Assets = 4045703+2999911/2

= 3522807

Ratio = 1644325/3522807

= 0.47:1

12. Return on Total assets = Net Income / Average Total Assets

Net Income = 273600

Ratio = 273600/3522807 *100

= 7.77%

13. Return on stock holder's equity = Net Income/ Shareholder's Equity

= 273600/1926525*100

= 14.20%

14. Return on common stock holder equity = Net Income /Common Equity

= 273600/1686525*100

= 16.22%

Common Equity = 270000+1416525

15. Earning per share = Earnings / No of equity shares

=273600/39000

= $ 7.02

No of equity share = 240000/20= 120000

= 270000/10 = 27000

17. dividend per of common stock = Dividend /No of common share

12150/27000

= $ 0.45

18. Dividend Yield = Dividend per share / MPS

= 0.45/65*100

=0.69%

16.