Question

Long-term debt ratio	0.2
Times interest earned	8.0
Current ratio	1.5
Quick ratio	1.0
Cash ratio	0.9
Inventory turnover	4.0
Average collection period	73	days

Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

INCOME STATEMENT
(Figures in $ millions)
Net sales	$
Cost of goods sold	$
Selling, general, and administrative expenses	17.00
Depreciation	27.00
Earnings before interest and taxes (EBIT)	$
Interest expense	$
Income before tax	$
Tax (35% of income before tax)	$
Net income	$

BALANCE SHEET
(Figures in $ millions)
		This Year			Last Year
Assets
Cash and marketable securities		$			$ 27
Accounts receivable		$			41
Inventories		$			33
Total current assets		$			$ 101
Net property, plant, and equipment		$			32
Total assets		$			$133
Liabilities and shareholders’ equity
Accounts payable		$20.00			$ 15
Notes payable		30.00			35
Total current liabilities		$			50
Long-term debt		$			27
Shareholders’ equity		$			56
Total liabilities and shareholders’ equity		$195.00			$133

Answer 1

INCOME STATEMENT
(Figures in $ millions)
Net sales	$205
Cost of goods sold	$132
Selling, general, and administrative expenses	17.00
Depreciation	27.00
Earnings before interest and taxes (EBIT)	$29
Interest expense	$3.63
Income before tax	$25.37
Tax (35% of income before tax)	$8.88
Net income	$16.49

BALANCE SHEET
(Figures in $ millions)
		This Year			Last Year
Assets
Cash and marketable securities		$45			$ 27
Accounts receivable		$5			41
Inventories		$25			33
Total current assets		$75			$ 101
Net property, plant, and equipment		$120			32
Total assets		$195			$133
Liabilities and shareholders’ equity
Accounts payable		$20.00			$ 15
Notes payable		30.00			35
Total current liabilities		$50.00			50
Long-term debt		$29			27
Shareholders’ equity		$116			56
Total liabilities and shareholders’ equity		$195.00			$133

Explanations:-

Total current liabilities = $20.00 + 30.00 = $50.00

Total current assets = Current Liability * Current Ratio

                                  = $50 × 1.5 = $75.00

Cash = Current Liability * Cash Ratio

                        = $50 × 0.9 = $45.00

Accounts receivable + Cash = Current Liability * Quick Ratio

                                               = $50.00 × 1.0 = $50.00

Accounts receivable = $50.00 – Cash = $50.00 – 45.00 = $5.00

Inventories = $75.00 – 45.00 – 5.00 = $25.00

Total assets = Total liabilities and shareholders’ equity = $195.00

Net property, plant, equipment = $195.00 – 75.00 = $120.00

Sales = (365 / Average collection period) × Beginning receivables = (365 / 73) × $41 = $205.00

Cost of goods sold = Inventory turnover × Beginning inventory = 4.0 × $33 = $132.00

EBIT = $205.00 – 132.00 – 17.00 – 27.00 = $29

Interest = EBIT / Times interest earned = $29 / $8.0 = $3.63

Income before tax = EBIT - Interest expense = $29.00 – 3.63 = $25.37

Tax = Income before tax × .35 = $25.37 × .35 = $8.88

Net income = Income before tax – Tax = $25.37 – $8.88 = $16.49

Long-term debt + Equity = Total liabilities and equity – Total current liablities = $195.00 – $50 = $145.00

Long-term debt ratio = .2 = Long-term debt / (Long-term debt + Equity) = Long-term debt / $145.00; LTD = $29.00

Shareholders' equity = Total liabilities and equity – Total current liabilities - Long-term debt = $195.00 – 50.00 – 29.00 = $116.00