a)
Case synopsis:
Company S is an aircraft company, which was formed, by Person M and Person T before 10 years. This company manufactures and sells airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its manufacturing process within 5 weeks.
Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He has mastered Finance and so he has been recruited in the company’s finance department. Person M and T has given him the financial statement of Company S. Person C has collected the ratios of industry of light airplane manufacturing.
Characters in the case:
- Company S
- Person C
- Person M
- Person T
Adequate information:
- Company S has niche market in which it sells initially to people who own and fly their own airplanes
- Company S takes up a different method for its operations
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
a)
Explanation of Solution
Given information: The income statement of Company S as on 2014 provides the following information.
- The sales is $24,092,400
- The cost of the goods sold is $17,982,000
- The earnings before interest and tax is $2,445,600
- The net income is $1,206,720
The
- The total current asset is $3,765,864
- The current assets is $438,048
- The total assets is $18,544,680
- The total current liabilities is $2,594,496
- The long term debt is $4,590,000
- The total equity is $11,360,184
- The total liabilities and equity is $18,544,680
Formula to calculate the current ratio:
Compute the current ratio:
Hence, the current ratio is 1.451 times.
b)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
b)
Explanation of Solution
Formula to calculate the quick ratio:
Compute the quick ratio:
Hence, the quick ratio is 0.8786 times.
c)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
c)
Explanation of Solution
Formula to calculate the cash ratio:
Compute the cash ratio:
Hence, the cash ratio is 0.1688 times.
d)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
d)
Explanation of Solution
Formula to calculate the total asset turnover ratio:
Compute the total asset turnover ratio:
Hence, the total asset turnover ratio is 1.299 times.
e)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
e)
Explanation of Solution
Formula to calculate the inventory turnover ratio:
Compute the inventory turnover ratio:
Hence, the inventory turnover ratio is 12.099 times.
f)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
f)
Explanation of Solution
Formula to calculate the receivables turnover ratio:
Compute the receivables turnover ratio:
Hence, the receivables turnover ratio is 13.082 times.
g)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
g)
Explanation of Solution
Formula to calculate the total debt ratio:
Compute the total debt ratio:
Hence, the total debt ratio is 0.387 times.
h)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
h)
Explanation of Solution
Formula to calculate the debt-equity ratio:
Compute the debt-equity:
Hence, the debt-equity ratio is 0.632 times.
Note: The total debt is calculated by adding the total-long term debt and total current liabilities.
i)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
i)
Explanation of Solution
Formula to calculate the equity multiplier:
Compute the equity multiplier ratio:
Hence, the equity multiplier ratio is 1.632 times.
j)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
j)
Explanation of Solution
Formula to calculate the times interest earned ratio:
Compute the times interest earned ratio:
Hence, the times interest earned are 5.629 times.
k)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
k)
Explanation of Solution
Formula to calculate the cash coverage ratio:
Compute the cash coverage ratio:
Hence, the cash coverage ratio is 7.43 times.
l)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
l)
Explanation of Solution
Formula to calculate the profit margin ratio:
Compute the profit margin:
Hence, the profit margin is 5.01%.
m)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
m)
Explanation of Solution
Formula to calculate the
Compute the return on assets (ROA):
Hence, the return on assets is 0.0650 or 6.50%
n)
To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement
n)
Explanation of Solution
Formula to calculate the
Compute the return on equity (ROE):
Hence, the return on equity is 0.0216 or 2.16%.
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Chapter 3 Solutions
Essentials of Corporate Finance
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