Chapter 4, Problem 5EYK

1)

To determine

Calculate the company’s return on sales ratio for 2012, 2013, and 2014. Explain the return on sales trend.

Explanation of Solution

Return on sales ratio: The ratio which evaluates the amount of net income earned for every dollar of net sales is referred to as return on sales ratio.

$\text{Return on sales ratio = }\frac{\text{Net income}}{\text{Net sales}}$

Compute the return on sales ratio for Incorporation G for the year 2012.

Net income = $1,567.3million

Net sales = $16,657.9million

$\begin{array}{c}\text{Return on sales ratio = }\frac{\text{Net income}}{\text{Net sales}}\\ \text{= }\frac{\$1,567.3\text{million}}{€16,657.9\text{million}}\\ \text{= 0}\text{.0940 or 9}\text{.40\%}\end{array}$

Compute the return on sales ratio for Incorporation G for the year 2013.

Net income = $1,855.2 million

Net sales = $17,774.1 million

$\begin{array}{c}\text{Return on sales ratio = }\frac{\text{Net income}}{\text{Net sales}}\\ \text{= }\frac{\$1,855.2\text{ million}}{\$17,774.1\text{ million}}\\ \text{= 0}\text{.1043 or 10}\text{.43\%}\end{array}$

Compute the return on sales ratio for Incorporation G for the year 2014.

Net income = $1,824.4 million

Net sales = $17,909.6 million

$\begin{array}{c}\text{Return on sales ratio = }\frac{\text{Net income}}{\text{Net sales}}\\ \text{= }\frac{\$1,824.4\text{ million}}{\$17,909.6\text{ million}}\\ \text{= 0}\text{.1018 or 10}\text{.18\%}\end{array}$

Trends:

• Profitability of Incorporation G is measured by return on sales ratio.
• The ratio is has increased from 9.4% in 2012 to 10.43% in 2013 and decreased to 10.18% in 2014.
• This shows that the company’s profitability has decreased slightly.

2)

To determine

Calculate the company’s Current ratio for 2013 and 2014. Explain the current ratio’s trend.

Explanation of Solution

Current ratio: Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets. The ideal current ratio is 2:1. The following formula is used to calculate current ratio.

$\text{Current ratio}\text{=}\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$

Compute current asset ratio for Incorporation G for the year 2013.

Current assets = $4,298.9 million

Current liabilities = $5293.9 million

$\begin{array}{c}\text{Current Ratio=}\frac{\text{Current assets}}{\text{Current}\text{liabilities}}\\ \text{=}\frac{\$4,298.9\text{ million}}{\$5293.9\text{ million}}\\ \text{=}\text{0}\text{.81 times}\end{array}$

Compute current asset ratio for Incorporation G for the year 2014.

Current assets = $4393.5 million

Current liabilities = $5,423.5 million

$\begin{array}{c}\text{Current Ratio}=\frac{\text{Current assets}}{\text{Current}\text{liabilities}}\\ =\frac{\$4393.5\text{ million}}{\$5,423.5\text{ million}}\\ =\text{0}\text{.81 times}\end{array}$

Trends:

• Liquidity of Incorporation G is evaluated by current ratio.
• Current ratio shows trend indicates there is no change in current ratio (0.81) in 2013 and in 2014.
• This shows that there is no change in the capacity to pay for short-term liabilities.

3)

To determine

Calculate the Company’s debt-to-total-assets ratio for 2013 and 2014. Explain the trend in debt-to-total-assets ratio.

Explanation of Solution

Compute debt-to-total-assets ratio for Incorporation G for the year 2013.

Total assets = $22,658 million

Total liabilities = $14,562 million

$\begin{array}{c}\text{Debt-to-total-assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ \text{=}\frac{\$14,562\text{million}}{\$22,658\text{ million}}\\ \text{= 0}\text{.6426 or 64}\text{.26\%}\end{array}$

Compute debt-to-total-assets ratio for Incorporation G for the year 2014.

Total assets = $23,145 million

Total liabilities = $15,156.2 million

$\begin{array}{c}\text{Debt-to-total-assets ratio = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ \text{=}\frac{\$15,156.2\text{ million}}{\$23,145\text{ million}}\\ \text{= 0}\text{.6548 or 65}\text{.48\%}\end{array}$

Trends:

• Liquidity of Incorporation G is measured by debt-to-total-assets ratio.
• The ratio shows an increasing trend from 64.26% in 2013 to 65.48% in 2014.
• This shows that the repaying capacity of the corporation has decreased.

4)

To determine

Calculate the Company’s free cash flow for 2012, 2013, and 2014. Explain the free cash flows trend.

Explanation of Solution

Free cash flow: Free cash flow describes the net cash provided from operating activities after making required adjustments for capital expenditures. In other words, it is the cash flow arrived after making payment for capital expenditures.

$\text{Free cash flow = Cash flows from operations – Capital expenditures}$

Particulars	2012	2013	2014
Free cash flows:
Cash flow from operating activities	$2,407.2	$2,926	$2,541
Less: Cash investment in property, plant and equipment	675.9	613.9	663.5
Free cash flow	$1,731.3	$2,312.1	$1,877.5

Table (1)

Trends:

• The ratio shows a mixed trend from 2012 to 2014.
• Incorporation G had a healthy free cash flow in the years to repay its lenders, pay dividends to stockholders.