Answer:
Phone Corporation
1. Return on equity, (Use AVG balance sheet figures %?)
= Net Income/Equity * 100
= $1,225/$10,672.5 * 100
= 11.48%
2. Return on assets (Use AVg balance sheet figures %?)
= Net Income/Average Assets
= $1,225/$27,938.5 * 100
= 4.38
3. Return on Capital Use AVg balance sheet figures %?
= Net Income/Liabilities + Equity * 100
= $1,225/$27,938.50 * 100
= 4.38%
4. Day in Inventory use start of year balance sheet Days?
= Average Inventory/Cost of goods sold * 365
= $212/$4,310 * 365
= 17.95 days
5. Inventory Turnover use start of year balance sheet
= Cost of goods sold/Average Inventory
$4,310/$212
= 20.33 times
6. Average collection period use start of year balance sheet Days?
= Average Accounts Receivable/Net Sales * 365
= $2,632/$13,600 * 365
= 70.64 days
7. Operating Profit margin %?
= Net Income/Sales * 100
= $1,225/$13,600 * 100
= 9%
8. Long term debt ratio (Use end of the year balance sheet):
= Long-term Debts/Total Assets
= $12,137/$27,758
= 0.44
9. Total debt ratio (Use end of the year balance sheet):
= Total Liabilities/Total Assets
= $17,637/$27,758
= 0.64
10. Time interest earned:
= EBIT/Interest Expense
= $2,460/$710
= 3.46 times
11. Current ratio (Use end of the year balance sheet):
= Current Assets/Current Liabilities
= $3,973/$5,500
= 0.72
12. Quick ratio (Use end of the year balance sheet):
= (Current Assets - Inventory)/Current Liabilities
= ($3,973 - 263)/ $5,500
= 0.67
Explanation:
a) Data:
Phone Corporation Income Statement
(Figures in $ millions)
Net sales $13,600
Cost of goods sold 4,310
Other expenses 4,162
Depreciation 2,668
Earnings before interest
and taxes (EBIT) $2,460
Interest expense 710
Income before tax $1,750
Taxes (at 30%) 525
Net income $1,225
Dividends $906
BALANCE SHEET
(Figures in $ millions)
a) Averages Balance Figures:
End Start Average
Year Year Figures
Assets
Cash and marketable securities $94 $163 $128.5
Receivables 2,632 2,590 $2,611
Inventories 212 263 $237.5
Other current assets 892 957 $924.5
Total current assets $3,830 $3,973 $3,901.5
Net property, plant, and equipment 20,023 19,965 $19,994
Other long-term assets 4,266 3,820 $4,043
Total assets $28,119 $27,758 $27,938.5
Liabilities and shareholders’ equity
Payables $2,614 $3,090 $2,852
Short-term debt 1,444 1,598 $1,521
Other current liabilities 836 812 $824
Total current liabilities $4,894 $5,500 $5,197
Long-term debt and leases 5,773 5,938 $5,855.5
Other long-term liabilities 6,228 6,199 $6,213.5
Total long-term liabilities $12,001 $12,137 $12,069
Total liabilities $16,895 $17,637 $17,266
Shareholders’ equity 11,224 10,121 $10,672.5
Total liabilities & shareholders’ equity $28,119 $27,758 $27,938.5
b) Days in Inventory is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The ratio measures the number of days funds are tied up in inventory.
c) Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given time period.
d) The average collection period is calculated by dividing the average balance of accounts receivable by total net credit sales for the period and multiplying the quotient by the number of days in the period.
e) For lack of space, other ratios are equally defined by the formulas for calculating them.
