Chapter 14 Homework Question Pr.14-1.Algo Question Pr.14-2.Algo Question Pr.14-3
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Nineteen Measures of The ability of a firm to pay its debts as they come due.Solvency and The ability of a firm to earn income.Profitability
The comparative financial statements of Blige Inc. are as follows. The market price of Blige Inc. common stock was $58 on December 31, 2016.
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Determine the following measures for 2016, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.
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Blige Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Retained earnings, January 1 $4,517,950 $3,801,250 Add net income for year 966,000 778,600 Total $5,483,950 $4,579,850 Deduct dividends On preferred stock $13,300 $13,300 On common stock 48,600 48,600 Total $61,900 $61,900 Retained earnings, December 31 $5,422,050 $4,517,950Explanation / Answer
1 The excess of the current assets of a business over its current liabilities.Working capital Total of Current Assets: $ 5,302,589 Total of Current Liabilities $ (1,606,854) Working Capital $ 3,695,735 2 A financial ratio that is computed by dividing current assets by current liabilities.Current ratio Current Ratio=Current Assets/Current Liabilities Current Ratio=$5,302,589/$1,606,854 Current Ratio= 3.30 3 A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable).Quick ratio Quick Ratio=Quick assets/Current Liabilities Quick Assets=Cash+Temporary investments =$1,229,990+$1,861,600 =$3,091,590 Quick Ratio=$3,091,590/$1,606,854 = 1.92 4 The relationship between sales and accounts receivable, computed by dividing the sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash.Accounts receivable turnover Average net accounts receivables is calculated by dividing the sum of accounts receivables of 31st Dec. 2015 and 31st Dec. 2016 with 2. Average net accounts receivables=($1,065,800+$1,131,500)/2 Average net accounts receivables=$1,098,650 Accounts receivable turnover=(Sales/Average Accounts Receivables) Accounts receivable turnover=$1,098,650/$6,372,170 = 5.8 5 The relationship between sales and accounts receivable, computed by dividing the average accounts receivable by the average daily sales.Number of days' sales in receivables Number of days sales in receivables=360/Turnover ratio =360/5.8 =62 days 6 The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory. Average Inventory=(Beginning inventory+Closing Inventory)/2 '=($657,000+$846,800)/2 '=$751,900 Inventory turnover=Cost of goods sold/Average Inventory '=$2,105,320/$751,900 '=2.8 7 The relationship between the volume of sales and inventory, computed by dividing average inventory by the average daily cost of goods sold. Number of days' sales in inventory=360/Inventory Turnover ratio '=360/2.8 '=129 days 8 The ratio of fixed assets to long-term liabilities provides a measure of whether note-holders or bondholders will be paid.Ratio of fixed assets to long-term liabilities Fixed asset to Long term liabilities=Fixed assets/Long Term Liabilities '=$5,610,000/$5,100,000 '=1.1 Fixed asset to Long term liabilities=1.1 9 The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity. Ratio of liabilities to stockholders' equity=Total liabilities/Shareholders Equity =$6,706,845/$7,452,050 =0.9 Liabilities to stockholders' equity=0.90 10 A ratio that measures creditor margin of safety for interest payments, calculated as income before income tax + interest expense divided by interest expense.Number of times interest charges are earned No. of times interest charges are earned=(Income before Income Tax+Interest Expense)/Interest Expense =($1,097,700+$408,000)/$408,000 =$1,505,700/$408,000 =3.7 11 A ratio that measures the risk that preferred dividends will not be paid if earnings decrease, calculated by dividing net income by the amount of preferred dividends.Number of times preferred dividends are earned Number of times preferred dividends are earned=(Net income/amount of preferred dividend) =$966,000/$13,300 =72.6 12 Ratio that measures how effectively a company uses its assets, computed as sales divided by average total assets. Ratio of sales to assets=Sales/Average total sales '=$6,404,030/$12,159,292 '=0.5 [Average total assets=($10,159,689+$14,158,895)/2=$12,159,292 13 A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.Rate earned on total assets Rate earned on total assets=Annual net income/Average total assets Annual net income=$966,000 Earned on Total Assets=($966,000/$12,159.292)*100 '=8% 14 A measure of profitability computed by dividing net income by average stockholders' equity.Rate earned on stockholders' equity Rate earned on stockholders' equity=Net income/Average stockholders equity Average stockholders equity=($6,547,950+$7,452,050)/2 '=$7,000,000 Rate earned on stockholders equity=($966,000/$7,000,000)*100 '=13.8% 15, A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Rate earned on common stockholders' equity Average common stockholders equity=($1,080,000+$1,080,000)/2=$1,080,000 Rate earned on common stockholders equity=(Net income-preferred dividend )/Average common stockholders equity '=[($966,000-$13,300)/$1,080,000]*100 ;=88.2% 16 The profitability ratio of net income available to common shareholders to the number of common shares outstanding.Earnings per share on common stock Earning per share on common stock=(Net income-Preferred dividend)/No. of common shares outstanding =($966,000-$13,300)/108,000 =$952,700/108,000 =8.8 17 The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.Price-earnings ratio Price earning ratio=Market price per share/Earning per share Market price per share=$58 Earning price per share=$8.8 Price earning ratio=$58/$8.8 '=6.6 18 Measures the extent to which earnings are being distributed to common shareholders.Dividends per share of common stock Dividend per share of common stock=Dividends for common stock/No. of common stock outstanding =$48,600/108,000 =$0.45 19 A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions.Dividend yield Dividend yield=Dividend per share of common stock/Market price per share '=$0.45/$58 '=0.78%
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