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Ratios and Fixed Assets [LO2] The Caughlin Company has a long-term debt ratio of .45 and a current ratio of 1.25. Current liabilities are $987, sales are $6,860, profit margin is 8.6 percent, and
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To calculate: The net fixed assets of the firm
Introduction:
The long-term tangible piece of property that a firm owns and utilizes for the production is a fixed asset. The 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 evaluate the performance of the firm and to find the actions that are necessary to improve the firm’s performance is known as ratio analysis.
Answer to Problem 20QP
The net fixed asset is $5,882.70.
Explanation of Solution
Given information:
The Company C has a long-term debt ratio of 0.45, current liabilities of $987, profit margin of 8.6%, current ratio of 1.25, sales of $6,860, and return on equity of 17.5%
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 $1,233.75.
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 8.6% is taken as 0.086
Hence, the net income is $589.96.
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 17.5% is taken as 0.175
Hence, the total equity is $3,371.20
Formula to calculate the long-term debt:
Note: The long-term debt ratio is given as 0.45. So, 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 $2,758.25
Formula to calculate the total debt:
Compute the total debt:
Hence, the total debt is $3,745.25.
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 $7,116.45.
Formula to calculate the net fixed assets:
Compute the net fixed assets:
Hence, the net fixed asset is $5,882.70.
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Chapter 3 Solutions
Fundamentals of Corporate Finance
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