Calculating Financial Ratios [LO2] Based on the balance sheets given for Just Dew It, calculate the following financial ratios for each year:
a. Current ratio.
b. Quick ratio.
c. Cash ratio.
d. NWC to total assets ratio.
e. Debt–equity ratio and equity multiplier.
f. Total debt ratio and long-term debt ratio.
a)
To calculate: The current ratio.
Introduction:
The financial ratios are important tools 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 17QP
The current ratio for the year 2014 and 2015 are 1.44 times and 1.51 times respectively.
Explanation of Solution
Given information:
- The total current assets (2014) is $90,717.
- The total current liabilities (2014) is $62,939.
- The total current assets (2015) is $100,617.
- The total current liabilities (2015) is $66,442.
Given the balance sheet of Corporation JD is as follows:
Corporation JD | |||||
Assets | Liabilities | ||||
2014 | 2015 | 2014 | 2015 | ||
Current Assets | Current liabilities | ||||
Cash | $11,135 | $13,407 | Accounts payable | $45,166 | $48,185 |
Accounts receivable | $28,419 | $30,915 | Notes payable | $17,773 | $18,257 |
Inventory | $51,163 | $56,295 | Total | $62,939 | $66,442 |
Total | $90,717 | $100,617 | |||
Long-term debt | $44,000 | $39,000 | |||
Owners' equity | |||||
Common stock and paid-in surplus | $50,000 | $50,000 | |||
Retained earnings | $260,234 | $302,735 | |||
Net plant and equipment | $326,456 | $357,560 | Total | $310,234 | $352,735 |
Total assets | $417,173 | $458,177 | Total liabilities and owners' equity | $417,173 | $458,177 |
Formula to calculate the current ratio:
Compute current ratio for the year 2014:
Compute current ratio for the year 2015:
Hence, the current ratio for the year 2014 and 2015 are 1.44 times and 1.51 times respectively.
b)
To calculate: The quick ratio.
Introduction:
The financial ratios are important tools 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 17QP
The quick ratio for the year 2014 and 2015 are 0.63 times and 0.67 times respectively.
Explanation of Solution
Given information:
- The total current asset (2014) is $90,717.
- Inventory (2014) is $51,163.
- The total current liabilities (2014) is $62,939.
- The total current asset (2015) is $100,617.
- Inventory (2015) is $56,295.
- The total current liabilities (2015) is $66,442.
Formula to calculate the current ratio:
Compute quick ratio for the year 2014:
Compute quick ratio for the year 2015:
Hence, the quick ratio for the year 2014 and 2015 are 0.63 times and 0.67 times respectively.
c)
To calculate: The cash ratio.
Introduction:
The financial ratios are important tools 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 17QP
The cash ratio for the year 2014 and 2015 are 0.18 times and 0.20 times respectively.
Explanation of Solution
Given information:
- Cash (2014) is $11,135.
- Total current liabilities (2014) is $62,939.
- Cash (2015) is $13,407.
- Total current liabilities (2015) is $66,442.
Formula to calculate the cash ratio:
Compute cash ratio for the year 2014:
Compute quick ratio for the year 2015:
Hence, the cash ratio for the year 2014 and 2015 are 0.18 times and 0.20 times respectively.
d)
To calculate: The net working capital to the ratio of total assets.
Introduction:
The financial ratios are important tools 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 17QP
The net working capital to total asset ratio for the year 2014 and 2015 are 0.0666 or 6.66% and 0.0746 or 7.46% respectively.
Explanation of Solution
Given information:
- The total current asset (2014) is $90,717.
- The total asset (2014) is $417,173.
- The total current liabilities (2014) is $62,939.
- The total current asset (2015) is $100,617.
- The total asset (2015) is $458,177.
- The total current liabilities (2015) is $66,442.
Formula to calculate the net working capital:
Note: It is required to calculate the net working capital to total asset ratio.
Compute the net working capital for the year 2014:
Compute the net working capital for the year 2015:
Hence, the net working capital for the year 2014 and 2015 are $27,778 and $34,175 respectively.
Formula to calculate the net working capital to total asset ratio:
Compute the net working capital to total asset ratio for the year 2014:
Compute the net working capital to total asset ratio for the year 2015:
Hence, the net working capital to total asset ratio for the year 2014 and 2015 are0.0666 or 6.66% and 0.0746 or 7.46% respectively.
e)
To calculate: Equity multiplier ratio.
Introduction:
The financial ratios are important tools 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 17QP
The equity multiplier ratio for the year 2014 and 2015 are 1.34 times and 1.30 times respectively.
Explanation of Solution
Given information:
- The total current liabilities (2014) is $62,939.
- The total long term debts (2014) is $44,000.
- The total equity (2014) is $310,234.
- The total current liabilities (2015) is $66,442.
- The total long term debts (2015) is $39,000.
- The total equity (2015) is $352,735.
Formula to calculate the total debt value:
Note: It is required to compute the value of total debt to calculate the total debt ratio.
Compute the total debt value for the year 2014:
Compute the total debt value for the year 2015:
Hence, the total debt value for the year 2014 and 2015 are $106,939 and $105,442 respectively.
Formula to calculate the total debt ratio:
Compute the total debt ratio for the year 2014:
Compute the total debt ratio for the year 2015:
Hence, the total debt ratio for the year 2014 and 2015 are 0.34 times and 0.30 times respectively.
Formula to calculate the equity multiplier ratio:
Compute the equity multiplier ratio for the year 2014:
Compute the equity multiplier ratio for the year 2015:
Hence, the equity multiplier ratio for the year 2014 and 2015 are 1.34 times and 1.30 times respectively.
f)
To calculate: The ratio of total debt and long-term debt.
Introduction:
The financial ratios are important tools 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 17QP
The long-debt ratio for the year 2014 and 2015 are 0.12 times and 0.10 times respectively.
Explanation of Solution
Given information:
- The total asset (2014) is $417,173.
- The total equity (2014) is $310,234.
- The total long-term debt (2014) is $44,000.
- The total asset (2015) is $458,177.
- The total equity (2015) is $352,735.
- The total long-term debt (2015) is $39,000.
Formula to calculate the total debt ratio:
Compute the total debt ratio for the year 2014:
Compute the total debt ratio for the year 2015:
Hence, the total debt ratio for the year 2014 and 2015 are 0.26 times and 0.23 times respectively.
Formula to calculate the long-term debt ratio:
Compute the long-debt ratio for the year 2014:
Compute the long-debt ratio for the year 2015:
Hence, the long-debt ratio for the year 2014 and 2015 are 0.12 times and 0.10 times respectively.
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Chapter 3 Solutions
Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
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