USAir has $54 million of current assets and $58 million of noncurrent assets. It forecasts an EBIT of $10.4 million and pays income taxes at a 35% rate. Short-term bank notes carry a 5% interest rate, and the company can issue long-term bonds at 7%. The company has set a target debt ratio of 45%. Required: I need assistance with Part D. Thanks for your help! A. For a maturity mix of 60% current and 40% long-term debt, prepare the company's abbreviated balance sheet. B. For a maturity mix of 60% current and 40% long-term debt, prepare the company's financial half of its income statement. C. Based on the financial statements above, calculate the return on equity ratio in order to evaluate the company's risk and return. D. Based on the financial statements above, calculate the current ratio in order to evaluate the company's risk and return. Transcribed Image Text:A Current assets Noncurrent assets Total Assets Current liabilities Long-term liabilities Total debit Stockholders' equity Total liabilities & equity B EBIT Interest on current liabilities Interest on noncurrent debt Total interest Earnings before taxes Income taxes Net income C Net income Stockholders' equity Return on equity D Current assets Current liabilities Return on equity Expert Solution arrow_forward Step 1 Answer a:- * Total assets = Current assets + non current assets = 54 + 58 = $112m * Debt ratio = Total debt / Total assets 0.45 = Total debt / 112 = $50.4m which includes short term bank notes as well as long term bonds Stockholders' equity = total assets - total debt = 112 - 50.4 = $61.6m * 60% of 50.4 = $30.24m is short term bank notes 40% of 50.4 = $20.16m is long term bonds The balance sheet will appear as follows:- Current assets $54m Non current assets 58 Total assets $112m Current liabilities $30.24m Long term liabilities 20.16 Total debt 50.4 Stockholders' equity 61.6 Total liabilities & equity $112m arrow_forward Step 2 Answer b:- * Interest on current liabilities = 5% of 30.24 = 1.51 * Interest on non current debt = 7% of 20.16 = 1.41 The company's income statement will appear as follows: EBIT (A) $10.4m Interest on current liabilities 1.51 Interest on non current debt 1.41 Total interest (B) 2.92 Earnings before taxes (A - B) 7.48 Income taxes @35% 2.62 Net income $4.86m arrow_forward Step 3 Answer C Return on equity = Net income / Stockholders' equity = 4.86 / 61.6 = 7.89%

USAir has $54 million of current assets and $58 million of noncurrent assets. It forecasts an EBIT of $10.4 million and pays income taxes at a 35% rate. Short-term bank notes carry a 5% interest rate, and the company can issue long-term bonds at 7%. The company has set a target debt ratio of 45%. Required: I need assistance with Part D. Thanks for your help! A. For a maturity mix of 60% current and 40% long-term debt, prepare the company's abbreviated balance sheet. B. For a maturity mix of 60% current and 40% long-term debt, prepare the company's financial half of its income statement. C. Based on the financial statements above, calculate the return on equity ratio in order to evaluate the company's risk and return. D. Based on the financial statements above, calculate the current ratio in order to evaluate the company's risk and return. Transcribed Image Text:A Current assets Noncurrent assets Total Assets Current liabilities Long-term liabilities Total debit Stockholders' equity Total liabilities & equity B EBIT Interest on current liabilities Interest on noncurrent debt Total interest Earnings before taxes Income taxes Net income C Net income Stockholders' equity Return on equity D Current assets Current liabilities Return on equity Expert Solution arrow_forward Step 1 Answer a:- * Total assets = Current assets + non current assets = 54 + 58 = $112m * Debt ratio = Total debt / Total assets 0.45 = Total debt / 112 = $50.4m which includes short term bank notes as well as long term bonds Stockholders' equity = total assets - total debt = 112 - 50.4 = $61.6m * 60% of 50.4 = $30.24m is short term bank notes 40% of 50.4 = $20.16m is long term bonds The balance sheet will appear as follows:- Current assets $54m Non current assets 58 Total assets $112m Current liabilities $30.24m Long term liabilities 20.16 Total debt 50.4 Stockholders' equity 61.6 Total liabilities & equity $112m arrow_forward Step 2 Answer b:- * Interest on current liabilities = 5% of 30.24 = 1.51 * Interest on non current debt = 7% of 20.16 = 1.41 The company's income statement will appear as follows: EBIT (A) $10.4m Interest on current liabilities 1.51 Interest on non current debt 1.41 Total interest (B) 2.92 Earnings before taxes (A - B) 7.48 Income taxes @35% 2.62 Net income $4.86m arrow_forward Step 3 Answer C Return on equity = Net income / Stockholders' equity = 4.86 / 61.6 = 7.89%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

Required: I need assistance with Part D. Thanks for your help!

A. For a maturity mix of 60% current and 40% long-term debt, prepare the company's
abbreviated balance sheet.

B. For a maturity mix of 60% current and 40% long-term debt, prepare the company's
financial half of its income statement.

C. Based on the financial statements above, calculate the return on equity ratio in order to
evaluate the company's risk and return.

D. Based on the financial statements above, calculate the current ratio in order to evaluate
the company's risk and return.

Transcribed Image Text:A Current assets Noncurrent assets Total Assets Current liabilities Long-term liabilities Total debit Stockholders' equity Total liabilities & equity B EBIT Interest on current liabilities Interest on noncurrent debt Total interest Earnings before taxes Income taxes Net income C Net income Stockholders' equity Return on equity D Current assets Current liabilities Return on equity

Expert Solution

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Step 1

Answer a:-

* Total assets = Current assets + non current assets = 54 + 58 = $112m

* Debt ratio = Total debt / Total assets

0.45 = Total debt / 112

= $50.4m which includes short term bank notes as well as long term bonds

Stockholders' equity = total assets - total debt

= 112 - 50.4 = $61.6m

* 60% of 50.4 = $30.24m is short term bank notes

40% of 50.4 = $20.16m is long term bonds

The balance sheet will appear as follows:-

Current assets	$54m
Non current assets	58
Total assets	$112m
Current liabilities	$30.24m
Long term liabilities	20.16
Total debt	50.4
Stockholders' equity	61.6
Total liabilities & equity	$112m

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Step 2

Answer b:-

* Interest on current liabilities = 5% of 30.24 = 1.51

* Interest on non current debt = 7% of 20.16 = 1.41

The company's income statement will appear as follows:

EBIT (A)	$10.4m
Interest on current liabilities	1.51
Interest on non current debt	1.41
Total interest (B)		2.92
Earnings before taxes (A - B)		7.48
Income taxes @35%		2.62
Net income		$4.86m

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Step 3

Answer C

Return on equity = Net income / Stockholders' equity

= 4.86 / 61.6

= 7.89%

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