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a)
To calculate: The current ratio
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
a)
Answer to Problem 17QP
The current ratio for the year 2011 and 2012 is 1.32 times and 1.38 times respectively.
Explanation of Solution
Given information:
- The total current assets (2011) are $75,598.
- The total current liabilities (2011) are $57,217.
- The total current assets (2012) are $83,848.
- The total current liabilities (2012) are $60,648.
Formula to calculate the current ratio:
Current ratio=Current assetsCurrent liabilities
Compute current ratio for the year 2011:
Current ratio=Current assets Current liabilities =$75,598$57,217=1.32 times
Compute current ratio for the year 2012:
Current ratio=Current assets Current liabilities =$83,848$60,648=1.38 times
Hence, the current ratio for the year 2011 and 2012 is 1.32 times and 1.38 times respectively.
b)
To calculate: The quick ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
b)
Answer to Problem 17QP
The quick ratio for the year 2011 and 2012 is 0.58 times and 0.61 times respectively.
Explanation of Solution
Given information:
- The total current asset (2011) is $75,598.
- Inventory (2011) is $42,636.
- The total current liabilities (2011) are $57,217.
- The total current asset (2012) is $83,848.
- Inventory (2012) is $46,915.
- The total current liabilities (2012) are $60,648.
Formula to calculate the current ratio:
Quick ratio=(Current assets−Inventory)Current liabilities
Compute quick ratio for the year 2011:
Quick ratio=(Current assets−Inventory)Current liabilities=($75,598−$42,636)$57,217=$32,962$57,217=0.58 times
Compute quick ratio for the year 2012:
Quick ratio=(Current assets−Inventory)Current liabilities=$83,848−$46,915$60,648=$44,322$66,442=0.61 times
Hence, the quick ratio for the year 2011 and 2012 is 0.58 times and 0.61 times respectively.
c)
To calculate: The cash ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
c)
Answer to Problem 17QP
The cash ratio for the year 2011 and 2012 is 0.16 times and 0.18 times respectively.
Explanation of Solution
Given information:
- Cash (2011) is $9,279.
- Total current liabilities (2011) are $57,217.
- Cash (2012) is $11,173
- Total current liabilities (2012) are $60,648.
Formula to calculate the cash ratio:
Cash ratio=CashCurrent liabilities
Compute cash ratio for the year 2011:
Cash ratio=CashCurrent liabilities=$9,279$57,217=0.16 times
Compute quick ratio for the year 2012:
Cash ratio=CashCurrent liabilities=$11,173$60,648=0.18 times
Hence, the cash ratio for the year 2011 and 2012 is 0.16 times and 0.18 times respectively.
d)
To calculate: The net working capital to the ratio of total assets
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
d)
Answer to Problem 17QP
The net working capital to total asset ratio for the year 2011 and 2012 is 5.29% and 6.08% respectively.
Explanation of Solution
Given information:
- The total current asset (2011) $75,598.
- The total asset (2011) is 347,645.
- The total current liabilities (2011) are $57,217.
- The total current asset (2012) is $83,848.
- The total asset (2012) is $381,815.
- The total current liabilities (2012) are $60,648.
Formula to calculate the net working capital:
Net working capital=Total assets−Total liabilities
Note: It is needed to compute the net working capital to calculate the net working capital to total asset ratio.
Compute the net working capital for the year 2011:
Net working capital=Total current assets−Total current liabilities=$75,598−$57,217=$18,381
Compute the net working capital for the year 2012:
Net working capital=Total current assets−Total current liabilities=$83,848−$60,648=$23,200
Hence, the net working capital for the year 2011 and 2012 is $18,381 and $23,200 respectively.
Formula to calculate the net working capital to total asset ratio:
Net working capital ratio=Net working capitalTotal assets
Compute the net working capital to total asset ratio for the year 2011:
Net working capital ratio=Net working capitalTotal assets=$18,381$347,645=0.0529 or 5.29%
Compute the net working capital to total asset ratio for the year 2012:
Net working capital ratio=Net working capitalTotal assets=$23,200$381,815=0.0608 or 6.08%
Hence, the net working capital to total asset ratio for the year 2011 and 2012 is 0.0529 or 5.29% and 0.0608 or 6.08% respectively.
e)
To calculate: The ratio of total debt.
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
e)
Answer to Problem 17QP
The debt equity ratio and equity multiplier ratio for the year 2011 and 2012 are 0.39 times and 0.33 times, 1.39 times and 1.33 times respectively.
Explanation of Solution
Given information:
- The total current liabilities (2011) are $57,217.
- The total long term debts (2011) are 40,000.
- The total equity (2011) is $250,428.
- The total current liabilities (2012) are $60,648.
- The total long term debts (2012) are $35,000.
- The total equity (2012) is $286,167.
Formula to calculate the total debt value:
Total debt=Total current liabilities+Long-term debt
Note: It is needed to compute the value of total debt to calculate the total debt ratio.
Compute the total debt value for the year 2011:
Total debt=Total current liabilities+Long-term debt=$57,217+$40,000=$97,217
Compute the total debt value for the year 2012:
Total debt=Total current liabilities+Long-term debt=$60,648+$35,000=$95,648
Hence, the total debt value for the year 2011 and 2012 is $97,217 and $95,648 respectively.
Formula to calculate the total debt ratio:
Total debt ratio=Total debtTotal equity
Compute the total debt ratio for the year 2011:
Total debt ratio=Total debtTotal equity=$97,217$250,428=0.39 times
Compute the total debt ratio for the year 2012:
Total debt ratio=Total debtTotal equity=$95,648$286,167=0.33 times
Hence, the total debt ratio for the year 2011 and 2012 is 0.39 times and 0.33 times respectively.
Formula to calculate the equity multiplier ratio:
Equity multiplier ratio=1+debt-equity ratio
Compute the equity multiplier ratio for the year 2011:
Equity multiplier ratio=1+debt-equity ratio=1+0.39=1.39 times
Compute the equity multiplier ratio for the year 2012:
Equity multiplier ratio=1+debt-equity ratio=1+0.33=1.33 times
Hence, the equity multiplier ratio for the year 2011 and 2012 is 1.39 times and 1.33 times respectively.
f)
To calculate: The long-term debt.
Introduction:
The financial ratios are an important tool for effective decision-making. They compare different figures taken from the financial statement to obtain information about the performance of the firm.
f)
Answer to Problem 17QP
The total debt ratio and long-debt ratio for the year 2011 and 2012 are 0.28 times and 0.25 times, 0.14 times and 0.11 times respectively.
Explanation of Solution
Given information:
- The total asset (2011) is 347,645.
- The total equity (2011) is $250,428.
- The total long-term debt (2011) is $40,000.
- The total asset (2012) is 381,815.
- The total equity (2012) is $286,167.
- The total long-term debt (2012) is $35,000.
Formula to calculate the total debt ratio:
Total debt ratio=Total assets−Total equityTotal assets
Compute the total debt ratio for the year 2011:
Total debt ratio=Total assets−Total equityTotal assets=$347,645−$250,428$347,645=$97,217$347,645=0.28 times
Compute the total debt ratio for the year 2012:
Total debt ratio=Total assets−Total equityTotal assets=$381,815−$286,167$381,815=$95,648$381,815=0.25 times
Hence, the total debt ratio for the year 2011 and 2012 is 0.28 times and 0.25 times respectively.
Formula to calculate the long-term debt ratio:
Long-term debt ratio=Long-term debtLong-term debt+Total equity
Compute the long-debt ratio for the year 2011:
Long-term debt ratio=Long-term debtLong-term debt+Total equity=$40,000$40,000+$250,428=$40,000$290,428=0.14 times
Compute the long-debt ratio for the year 2012:
Long-term debt ratio=Long-term debtLong-term debt+Total equity=$35,000$35,000+$286,167=$35,000$321,167=0.11 times
Hence, the long-debt ratio for the year 2011 and 2012 is 0.14 times and 0.11 times respectively.
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Chapter 3 Solutions
Fundamentals Of Corporate Finance, Tenth Standard Edition
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