Question

The following information pertains to Austin, Inc. and Huston Company:

Account Title		Austin				Huston
Current assets		$	40,000			$	62,500
Total assets			480,000				480,000
Current liabilities			12,000				31,250
Total liabilities			290,000				376,000
Stockholders’ equity			190,000				104,000
Interest expense			15,800				18,400
Income tax expense			31,600				28,800
Net income			70,000				70,700

Required
a-1. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed). (Round your "Debt-to-assets ratio" and "Times interest earned" to 1 decimal place and current ratio answers to 2 decimal places.)

Compute each company’s return-on-equity ratio and return-on-assets ratio. Use EBIT instead of net income when computing the return-on-assets ratio. (Round your answers to 2 decimal places.)

Answer 1

a) Calculate following :

	Formula	Austin	Huston
Debt to assets ratio	Total liabilities/Total assets	290000/480000 = 0.6 Times	376000/480000 = 0.8
Current ratio	Current assets/current liabilities	40000/12000 = 3.33 Times	62500/31250 = 2.00 Times
Times interest earned	EBIT/Interest expense	(70000+15800+31600)/15800 = 7.4 Times	(70700+18400+28800)/18400 = 6.4 Times

b) Calculate following

		Austin company	Huston company
Return on equity	Net income/Equity	70000/190000 = 36.84%	70700/104000 = 67.98%
Return on assets	EBIT/Total assets	117400/480000 = 24.46%	117900/480000 = 24.56%