Calculating Financial Ratios. Based on the balance sheets given for Bethesda Mining, calculate the following financial ratios for each year:
a. Current ratio
b. Quick ratio
c. Cash ratio
d. Debt–equity ratio and equity multiplier
e. Total debt ratio
a)
To calculate: The current ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.
Answer to Problem 16QP
The current ratio for the year 2015 and 2016 are 0.70 times and 0.79 times respectively.
Explanation of Solution
Given information:
- The total current assets (2015) is $175,278.
- The total current liabilities (2015) is $250,749.
- The total current assets (2016) is $205,685.
- The total current liabilities (2016) is $261,590.
Formula to calculate the current ratio:
Compute current ratio for the year 2015:
Compute current ratio for the year 2016:
Hence, the current ratio for the year 2015 and 2016 are 0.70 times and 0.79 times respectively.
b)
To calculate: The quick ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.
Answer to Problem 16QP
The quick ratio for the year 2015 and 2016 are 0.26 times and 0.29 times respectively.
Explanation of Solution
Given information:
- The total current asset (2015) is $175,278.
- Inventory (2015) is $109,626.
- The total current liabilities (2015) is $250,749.
- The total current asset (2016) is $205,685.
- Inventory (2016) is $129,253.
- The total current liabilities (2016) is $261,590.
Formula to calculate the current ratio:
Compute quick ratio for the year 2015:
Compute quick ratio for the year 2016:
Hence, the quick ratio for the year 2015 and 2016 are 0.26 times and 0.29 times respectively.
c)
To calculate: The cash ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.
Answer to Problem 16QP
The cash ratio for the year 2015 and 2016 are 0.08 times and 0.08 times respectively.
Explanation of Solution
Given information:
- Cash (2015) is $19,256.
- Total current liabilities (2015) is $250,749.
- Cash (2016) is $21,946.
- Total current liabilities (2016) is $261,590.
Formula to calculate the cash ratio:
Compute cash ratio for the year 2015:
Compute quick ratio for the year 2016:
Hence, the cash ratio for the year 2015 and 2016 are 0.08 times and 0.08 times respectively.
d)
To calculate: The debt-equity ratio and equity multiplier ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.
Answer to Problem 16QP
The debt-equity ratio and equity multiplier ratio for the year 2015 and 2016 are 1.35 times and 1.20 times respectively and 2.35 times and 2.20 times respectively.
Explanation of Solution
Given information:
- The total current liabilities (2015) is $261,590.
- The total long term debt (2015) is $255,000.
- The total equity (2015) is $374,915.
- The total current liabilities (2016) is $261,590.
- The total long term debt (2016) is $278,500.
- The total equity (2016) is $450,800.
Formula to calculate the total debt value:
Note: It is needed to compute the value of total debt to calculate the total debt ratio.
Compute the total debt value for the year 2015:
Compute the total debt value for the year 2016:
Hence, the total debt value for the year 2015 and 2016 are $516,590 and $540,090 respectively.
Formula to calculate the total debt ratio:
Compute the total debt ratio for the year 2015:
Compute the total debt ratio for the year 2016:
Hence, the total debt ratio for the year 2015 and 2016 are 1.35 times and 1.20 times respectively.
Formula to calculate the equity multiplier ratio:
Compute the equity multiplier ratio for the year 2015:
Compute the equity multiplier ratio for the year 2016:
Hence, the equity multiplier ratio for the year 2015 and 2016 are 2.35 times and 2.20 times respectively.
e)
To calculate: The total debt ratio.
Introduction:
The financial ratios are an important tool for effective decision-making. It compares different figures taken from the financial statement to obtain information about the performance of the firm.
Answer to Problem 16QP
The total debt ratio for the year 2015 and 2016 are 0.57 times and 0.55 times respectively.
Explanation of Solution
Given information:
- The total asset (2015) is $880,664.
- The total equity (2015) is $374,915.
- The total long term debt (2015) is $255,000.
- The total asset (2016) is $990,890.
- The total equity (2016) is $450,800.
- The total long-term debt (2016) is $278,500.
Formula to calculate the total debt ratio:
Compute the total debt ratio for the year 2015:
Compute the total debt ratio for the year 2016:
Hence, the total debt ratio for the year 2015 and 2016 are 0.57 times and 0.55 times respectively.
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Chapter 3 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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