Financial Ratios. Here are simplified financial statements for Phone Corporation in a recent year:
Calculate the following financial ratios for Phone Corporation using the methodologies listed for each part:
- a.
Return on equity (use average balance sheet figures) - b.
Return on assets (use average balance sheet figures) - c. Return on capital (use average balance sheet figures)
- d. Days in inventory (use start-of-year balance sheet figures)
- e. Inventory turnover (use start-of-year balance sheet figures)
- f. Average collection period (use start-of-year balance sheet figures)
- g. Operating profit margin
- h. Long-term debt ratio (use end-of-year balance sheet figures)
- i. Total debt ratio (use end-of-year balance sheet figures)
- j. Times interest earned
- k. Cash coverage ratio
- l. Current ratio (use end-of-year balance sheet figures)
- m. Quick ratio (use end-of-year balance sheet figures)
a.
To compute: Return on equity (ROE)
Explanation of Solution
The formula to calculate return on equity is as follows:
The calculation of return on equity is as follows:
Hence, the ROE is 13%
b.
To compute: Return on assets (ROA)
Explanation of Solution
The formula to calculate return on asset is as follows:
The calculation of return on capital is as follows:
Hence, the ROA is 6.04%
c.
To compute: Return on capital (ROC)
Explanation of Solution
The formula to calculate return on capital is as follows:
The calculation of return on equity is as follows:
Hence, the ROC is 10.20%
d.
To compute: Days in inventory.
Explanation of Solution
The formula to calculate days in inventory is as follows:
.
The calculation of days in inventory is as follows:
Hence, the days in inventory is 21.40 days
e.
To compute: Inventory turn over
Explanation of Solution
The formula to calculate inventory turnover is as follows:
The calculation of inventory turnover is as follows:
Hence, the inventory turnover is 19.11
f.
To compute: Average collection period(ACP)
Explanation of Solution
The formula to calculate average collection period is as follows:
The calculation of average collection period is as follows:
Hence, the ACP is 68.89 days.
g.
To compute: Operating profit margin (OPM)
Explanation of Solution
The formula to calculate operating profit margin is as follows:
The calculation of operating profit margin is as follows:
Hence, the OPM is 12.64%
h.
To compute: Long term debt ratio
Explanation of Solution
The formula to calculate operating profit margin is as follows:
The calculation of long term debt ratio is as follows:
Hence the long term debt ratio is 0.42
i.
To compute: Total debt ratio
Explanation of Solution
The formula to calculate total debt ratio is as follows:
The calculation of total debt ratio is as follows:
Hence the total debt ratio is 0.65
j.
To compute: Times interest earned
Explanation of Solution
The formula to calculate times interest earned is as follows:
The calculation of times interest earned is as follows:
Hence the time interest earned is 3.75
k.
To compute: Cash coverage ratio
Explanation of Solution
The formula to calculate cash coverage ratio is as follows:
The calculation of cash coverage ratio is as follows:
Hence the cash coverage ratio is 7.42
l.
To compute: Current ratio
Explanation of Solution
The formula to calculate current ratio is as follows:
The calculation of current ratio is as follows:
Hence the current ratio is 0.74
m.
To compute: Quick ratio
Explanation of Solution
The formula to calculate quick ratio is as follows:
The calculation of quick ratio is as follows:
Hence the quick ratio is 0.52
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Chapter 4 Solutions
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