Chapter 14, Problem 4CP

Summary Introduction

(a)

To Determine:

The quick ratio should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the quick ratio can be determined by dividing the total value of cash equivalents, marketable securities and accounts receivables to current liabilities.

Answer to Problem 4CP

The quick ratio is 0.99 for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The quick ratio for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Quick Ratio =}\frac{\$325+\$3599}{\$3945}\\ \text{Quick Ratio =0}\text{.99}\end{array}$

Summary Introduction

(b)

To Determine:

The return of assets should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the return of assets ratio can be determined by taking a division of values of net income and total assets.

Answer to Problem 4CP

The return of assets is 36.4% for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The return of assets for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Return on Assets- ROA =}\frac{EBIT}{Assets}\\ \text{ROA =}\frac{\$2259+\$78}{0.5\times \left(\$8058+\$4792\right)}\\ \text{ROA =0}\text{.364}\\ \text{ROA =36}\text{.4\%}\end{array}$

Summary Introduction

(c)

To Determine:

The return on common shareholder's equity ratio should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the return on common shareholder's equity ratio is taken by subtraction of preferred dividend from Net income which is then divided by average common stockholder's equity.

Answer to Problem 4CP

The return on common shareholder's equity ratio is 42.6% for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

We have the formula for the return on common shareholder's equity ratio as below:

  $\text{ROE =}\frac{\text{Net Income-preferred dividends}}{Average\text{ common equity}}$

Let us first find the values required,

1. Preferred dividends $=0.1\times \$25\times 18,000=\$45,000$
2. Common Equity in 2009 $=\$829+\$575+\$1949=\$3353\text{ million}$
3. Common Equity in 2008 $=\$550+\$450+\$1368=\$2368\text{ million}$

So, the return on common shareholder's equity would be:

  $\begin{array}{l}\text{ROE =}\frac{\text{Net Income-preferred dividends}}{Average\text{ common equity}}\\ \text{ROE =}\frac{\$1265-\$45}{0.5\times \left(\$3353+\$2368\right)}\\ \text{ROE =0}\text{.426}\\ \text{ROE =42}\text{.6\%}\end{array}$

Summary Introduction

(d)

To Determine:

The earnings per share should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the earnings per share is calculated through below mentioned formula:

  $\text{Earning Pe share=}\frac{\text{Net Income-preferred dividends}}{WeightedAverage\text{ common share outstanding}}$

Answer to Problem 4CP

The earnings per share is $1.77 for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The earnings per share for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Earning per share=}\frac{\text{Net Income-preferred dividends}}{WeightedAverage\text{ common share outstanding}}\\ \text{Earning per share=}\frac{\text{\$1265-\$45}}{0.5\times \left(829+550\right)}\\ \text{Earning per share=\$1}\text{.77}\end{array}$

Summary Introduction

(e)

To Determine:

The profit margin should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the profit margin is defined as the percentage of revenue remaining after all expenses like depreciations, interest, taxes etc. It is a value which is mostly analyzed by any company to understand other financial measurements.

Answer to Problem 4CP

The profit margin is 19.4% for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The profit margin for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Profit Margin =}\frac{EBIT}{Sales}\\ \text{Profit Margin =}\frac{\$2259+\$78}{\$12065}\\ \text{Profit Margin =0}\text{.194}\\ \text{Profit Margin =19}\text{.4\%}\end{array}$

Summary Introduction

(f)

To Determine:

The times interest earned should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the times interest earned for any company represents an indication for company to meet the interest payment on its debts. To measure its value the income before interest and income tax expenses is divided by the interest expenses.

Answer to Problem 4CP

The times interest earned is 30.0 for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The times interest earned should be determined for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Times interest Earned =}\frac{EBIT}{\text{Interest Expense}}\\ \text{Times interest Earned =}\frac{\text{\$2259+\$78}}{\text{\$78}}\\ \text{Times interest Earned =30}\text{.0}\end{array}$

Summary Introduction

(g)

To Determine:

The inventory turn-over should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the inventory turn-over can be determined by dividing the cost of goods sold a period by the average inventory for that period.

Answer to Problem 4CP

The inventory turn-over is 4.19 for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The inventory turn-over should be determined for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Inventory Turn-over=}\frac{\text{Cost of Goods sold}}{Average\text{ Inventory}}\\ \text{Inventory Turn-over=}\frac{\$8048}{0.5\times \left(\$1415+\$2423\right)}\\ \text{Inventory Turn-over= 4}\text{.19}\end{array}$

Summary Introduction

(h)

To Determine:

The leverage ratio should be determined for Chicago Refrigerator Inc. for 2009.

Introduction:

In any financial statements, the leverage ratio is important to understand how much capital comes in form of loans (debts). It also assesses the ability of a company to meet its financial obligations.

Answer to Problem 4CP

The leverage ratio is 2.25 for Chicago Refrigerator Inc. for 2009.

Explanation of Solution

Given Information:

The financial statement of Chicago Refrigerator Inc. for 2009

The leverage ratio should be determined for Chicago Refrigerator Inc. for 2009 can be calculated by use of below formula:

  $\begin{array}{l}\text{Leverage Ratio =}\frac{Average\text{ assets}}{Average\text{ common equity}}\\ \text{Leverage Ratio =}\frac{0.5\times \left(\$4792+\$8058\right)}{0.5\times \left(\$2368+\$3353\right)}\\ \text{Leverage Ratio =2}\text{.25}\end{array}$