Ratios and Fixed Assets The Whisenhunt Company has a ratio of long-term debt to long-term debt and equity of .29 and a current ratio of 1.20. Current liabilities are $ 1,280, sales arc $6,140, profit margin is 8.9 percent, and
To calculate: The net fixed assets of the firm.
Introduction:
A long-term tangible piece of property that a firm owns and utilizes for production is a fixed asset. A firm is not expected to consume or convert the fixed asset into cash within a year of time. The fixed assets are collectively termed as, “plant”.
The process of analyzing and calculating the financial ratios in order to assess the performance of a firm and to find the actions that are necessary to improve a firm’s performance is known as ratio analysis.
Answer to Problem 15QP
The net fixed asset is $4,117.08.
Explanation of Solution
Given information:
The Company W has a long-term debt ratio of 0.29, current liabilities of $1,280, profit margin of 8.9%, current ratio of 1.20, sales of $6,140, and the return on equity of 17.6%.
Note: The net fixed assets of the firm can be found with the help of the current assets and the total assets (Total assets = Current assets + Net fixed assets). Utilizing the given current liabilities and the current ratio, the current asset can be solved.
Formula to calculate the current asset:
Note: Using the formula of current ratio, the current assets can be calculated.
Compute the current asset:
Hence, the current asset is $1,536.
Note: To find the total assets, it is essential to find the total equity and the total debt from the given information. Thus, the net income is found using the formula of profit margin.
Formula to calculate the net income:
Compute the net income:
Note: The profit margin of 8.9% is taken as 0.089.
Hence, the net income is $546.46.
Formula to calculate the total equity:
Note: Using the calculated net income figure as an input in the return on equity, the total equity can be calculated.
Compute the total equity:
Note: The total equity of 17.6% is taken as 0.176.
Hence, the total equity is $3,104.89.
Formula to calculate the long-term debt:
Note: The long-term debt ratio is given as 0.29. Therefore, with the help of the long-term debt ratio, an equation can be computed.
Compute an equation using the formula of long-term debt ratio:
Note: By inverting both the sides, the following equation can be computed.
Now, the calculated total equity is substituted in the equation to find the long-term debt.
Hence, the long-term is $1,268.195.
Formula to calculate the total debt:
Compute the total debt:
Hence, the total debt is $2,548.195.
Note: With the help of total debt, the total debt and equity can be found, which is equal to the total assets.
Formula to calculate the total assets:
Compute the total assets:
Hence, the total asset is $5,653.08.
Formula to calculate the net fixed assets:
Compute the net fixed assets:
Hence, the net fixed asset is $4,117.08.
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Chapter 3 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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