Chapter 15, Problem 15.33BP

Requirement 1

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities.

Formula:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current}\text{liabilities}}$

The ideal current ratio is 2:1

Debt ratio: Debt ratio is determined as total liabilities by total assets. It is used by the company to determine the debt amount that is used to finance assets of the company. When the ratio is higher than 50%, then the risk is higher.

Formula: $\text{Debt ratio}=\frac{\text{Total liabilities}}{\text{Total assets}}$

Earnings per share: Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.

Formula:

$\text{Earnings}\text{per}\text{share = }\frac{\text{Net}\text{income – Preferred}\text{dividends}}{\text{Weighted average number of common shares outstanding}}$

Compute of Company MT’s current ratio, debt ratio and earnings per share.

To compute: Current ratio, debt ratio and earnings per share

Requirement 2

To determine

To compute: Current ratio, debt ratio, and earnings per share after evaluation of the following transactions: