Chapter 3, Problem 1M

a)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Case synopsis:

Company S is an aircraft company, which was formed by Person M and Person T before 10 years. The company is manufacturing and selling airplanes. However, the company has received fair reviews on its products for reliability and safety. It can complete its process of manufacturing within 5 weeks.

Person C was hired recently by the Company S to assess and evaluate the financial performance of the company. He graduated with a finance degree and has been employed in a finance department of a company. Person M and T have given the financial statement of Company S, and Person C has collected the ratios of industry of light airplane manufacturing.

Characters of the case:

• Company S
• Person C

Adequate information:

• Company S has niche market in which it sells initially to individuals who own their own airplanes.
• Company S takes up a different method for its operations.

Answer to Problem 1M

The current ratio is 0.71 times.

Explanation of Solution

Given information: The income statement of Company S as on 2012 provides the following information.

• The sales is $36,599,300.
• The cost of the goods sold is $26,669,496.
• The Earnings before Interest and Tax (EBIT) is $3,648,604.
• The interest is $573,200.
• The net income is $1,845,242.

The balance sheet of the Company as on 2012 provides the following information:

• The total current asset is $1,967,860.
• The inventory is $933,400.
• The accounts receivable is $637,560.
• The cash is $396,900.
• The total assets are $17,379,480.
• The total current liabilities are $2,773,050.
• The long term debt is $5,050,000.
• The total equity is $9,556,430.
• The total liabilities and equity are $17,379,480.

Formula to calculate the current ratio:

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

Compute the current ratio:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{Current ratio }=\frac{\$1,967,860}{\$2,773,050}\\ =0.71\text{ times}\end{array}$

Hence, the current ratio is 0.71 times.

b)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The quick ratio is 0.37 times.

Explanation of Solution

Formula to calculate Quick ratio:

$\text{Quickratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}$

Compute the quick ratio:

$\begin{array}{c}\text{Quick ratio}=\frac{\left(\text{Current assets}-\text{Inventory}\right)}{\text{Current liabilities}}\\ =\frac{\left(\$1,967,860-\$933,400\right)}{\$2,773,050}\\ =\frac{\$1,034,460}{\$2,773,050}\\ =0.37\text{times}\end{array}$

Hence, the quick ratio is 0.37 times.

c)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The cash ratio is 0.14 times.

Explanation of Solution

Formula to calculate the cash ratio:

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

Compute the cash ratio:

$\begin{array}{c}\text{Cash ratio}=\frac{\text{Cash}}{\text{Current liabilities}}\\ =\frac{\$396,900}{\$2,773,050}\\ =0.14\text{ times}\end{array}$

Hence, the cash ratio is 0.14 times.

d)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The total asset turnover ratio is 2.11 times.

Explanation of Solution

Formula to calculate the total asset turnover ratio:

$\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}$

Compute the total asset turnover ratio:

$\begin{array}{c}\text{Total asset turnover ratio}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$36,599,300}{\$17,379,480}\\ =2.11\text{ times}\end{array}$

Hence, the total asset turnover ratio is 2.11 times.

e)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The inventory turnover ratio is 28.57 times.

Explanation of Solution

Formula to calculate the inventory turnover ratio:

$\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}$

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio}=\frac{\text{Cost of goods sold}}{\text{Inventory}}\\ =\frac{\$26,669,496}{\$933,400}\\ =28.57\text{ times}\end{array}$

Hence, the inventory turnover ratio is 28.57 times.

f)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The receivables turnover ratio is 57.41 times.

Explanation of Solution

Formula to calculate the receivables turnover ratio:

$\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}$

Compute the receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio}=\frac{\text{Sales}}{\text{Accounts receivables}}\\ =\frac{\$36,599,300}{\$637,560}\\ =57.41\text{ times}\end{array}$

Hence, the receivables turnover ratio is 57.41 times.

g)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The total debt ratio is 0.45 times.

Explanation of Solution

Formula to calculate the total debt ratio:

$\text{Total debt ratio = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}$

Compute the total debt ratio:

$\begin{array}{c}\text{Total debt ratio = }\frac{\left(\text{Total assets}-\text{Total equity}\right)}{\text{Total assets}}\\ =\frac{\left(\$17,379,480-\$9,556,430\right)}{\$17,379,480}\\ =\frac{\$7,823,050}{\$17,379,480}\\ =0.45\text{ times}\end{array}$

Hence, the total debt ratio is 0.45 times.

h)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The debt-equity ratio is 0.82 times.

Explanation of Solution

Formula to calculate the debt-equity ratio:

$\text{Debt-equity ratio}=\frac{\text{Total debt}}{\text{Total equity}}$

Compute the debt-equity:

$\begin{array}{c}\text{Debt-equity ratio}=\frac{\text{Total debt}}{\text{Total equity}}\\ =\frac{2,773,050+5,050,000}{9,556,430}\\ =\frac{7,823,050}{9,556,430}\\ =0.82\text{ times}\end{array}$

Hence, the debt-equity ratio is 0.82 times.

Note: The total debt is calculated by adding the total-long term debt and total current liabilities.

i)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The equity multiplier ratio is 1.82 times.

Explanation of Solution

Formula to calculate the equity multiplier:

$\text{Equity multiplier ratio}=1+\text{debt-equity ratio}$

Compute the equity multiplier ratio:

$\begin{array}{c}\text{Equity multiplier ratio}=1+\text{debt-equity ratio}\\ =1+0.82\\ =1.82\text{ times}\end{array}$

Hence, the equity multiplier ratio is 1.82 times.

j)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The times interest earned ratio is 6.37 times.

Explanation of Solution

Formula to calculate the times interest earned ratio:

$\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}$

Compute the times interest earned ratio:

$\begin{array}{c}\text{Times interest earned}=\frac{\text{Earnings before interest and taxes}}{\text{Interest}}\\ =\frac{\$3,648,604}{\$573,200}\\ =6.37\text{ times}\end{array}$

Hence, the times interest earned are 6.37 times.

k)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The cash coverage ratio is 9.23 times.

Explanation of Solution

Formula to calculate the cash coverage ratio:

$\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}$

Compute the cash coverage ratio:

$\begin{array}{c}\text{Cash coverage ratio}=\frac{\text{Earnings before interest and taxes}+\text{Depreciation}}{\text{Interest}}\\ =\frac{\$3,648,604+\$1,640,200}{\$573,200}\\ =\frac{\$5,288,804}{\$573,200}\\ =9.23\text{ times}\end{array}$

Hence, the cash coverage ratio is 9.23 times.

l)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The profit margin ratio is 5.04%.

Explanation of Solution

Formula to calculate the profit margin ratio:

$\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}$

Compute the profit margin:

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net income}}{\text{Sales}}\\ =\frac{\$1,845,242}{\$36,599,300}\\ =0.0504\text{ or 5}\text{.04}\%\end{array}$

Hence, the profit margin is 5.04%.

m)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The return on assets is 10.62%.

Explanation of Solution

Formula to calculate the Return on assets (ROA):

$\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}$

Compute the Return on assets (ROA):

$\begin{array}{c}\text{ROA}=\frac{\text{Net income}}{\text{Total assets}}\\ =\frac{\$1,845,242}{\$17,379,480}\\ =0.1062\text{ or }10.62\%\end{array}$

Hence, the return on assets is 0.1062 or 10.62%.

n)

Summary Introduction

To calculate: The ratios listed in the light-plane industries ratio using Company S financial statement.

Answer to Problem 1M

The return on equity is 19.31%.

Explanation of Solution

Formula to calculate the Return on equity (ROE):

$\text{ROA}=\frac{\text{Net income}}{\text{Total equity}}$

Compute the Return on equity (ROE):

$\begin{array}{c}\text{ROE}=\frac{\text{Net income}}{\text{Total equity}}\\ =\frac{\$1,845,242}{\$9,556,430}\\ =0.1931\text{ or }19.31\%\end{array}$

Hence, the return on equity is 0.1931 or 19.31%.