The following information pertains to Wayde’s Fish Tanks and Theresa’s Critter C
ID: 2509121 • Letter: T
Question
The following information pertains to Wayde’s Fish Tanks and Theresa’s Critter Control at the end of 2016:
ACCOUNT TITLE WAYDE’S FISH THERESA’S CRITTER
TANKS CONTROL
Current Assets
$ 45,000
$ 45,000
Total Assets
800,000
800,000
Current Liabilities
78,000
57,000
Total Liabilities
675,000
500,000
Stockholders’ Equity
125,000
300,000
Interest Expense
62,000
45,000
Income Tax Expense
69,000
75,500
Net Income
105,000
115,000
Compute each company’s debt to asset ratio, current ratio and times interest earned (EBIT must be computed…Earnings Before Interest and Taxes). Identify the company with the greater financial risk.
Compute each company’s return on equity ratio and return on assets ratio. Use EBIT instead of net income when computing the return on assets ratio. Identify the company that is managing its assets more effectively. Identify the company that is producing the higher return from the stockholders’ perspective. Explain how one company was able to produce a higher return on equity than the other.
Current Assets
$ 45,000
$ 45,000
Total Assets
800,000
800,000
Current Liabilities
78,000
57,000
Total Liabilities
675,000
500,000
Stockholders’ Equity
125,000
300,000
Interest Expense
62,000
45,000
Income Tax Expense
69,000
75,500
Net Income
105,000
115,000
Explanation / Answer
WAYDE fish tanks
THERESA critter control
1-
debt to asset ratio
total of liabilities/total assets
0.84375
0.625
total of liabilities
675000
500000
total of assets
800000
800000
2-
current assets
current assets/current liabilities
0.576923
0.789474
current assets
45000
45000
current liabilities
78000
57000
3-
Times interest earned
EBIT/interest
3.806452
5.233333
EBIT
net income+ income tax expense+interest expense
236000
235500
Interest
62000
45000
EBIT
105000+69000+62000
236000
EBIT
115000+75500+45000
235500
Company WAYDE fish is at higher financial risk because it is more leveraged as it s debt to total asset ratio is greater and it is also poor in terms of short term solvency(current ratio) and its interest coverage ratio is also less than the competitor firm
4-
return on equity
Net income/total of equity
84.00%
38.33%
Net income
105000
115000
total of equity
125000
300000
5-
return on assets
EBIT/total of assets
29.50%
29.44%
EBIT
236000
235500
total of assets
800000
800000
Company WAYDE is producing higher return to equity shareholders in comparison to its competitor because it is using more leverage in its capital structure and due to high leverage it is producing high returns to equity shareholders
Both companies are managing its assets more effectively as retirn on total assets are almost equal
WAYDE fish tanks
THERESA critter control
1-
debt to asset ratio
total of liabilities/total assets
0.84375
0.625
total of liabilities
675000
500000
total of assets
800000
800000
2-
current assets
current assets/current liabilities
0.576923
0.789474
current assets
45000
45000
current liabilities
78000
57000
3-
Times interest earned
EBIT/interest
3.806452
5.233333
EBIT
net income+ income tax expense+interest expense
236000
235500
Interest
62000
45000
EBIT
105000+69000+62000
236000
EBIT
115000+75500+45000
235500
Company WAYDE fish is at higher financial risk because it is more leveraged as it s debt to total asset ratio is greater and it is also poor in terms of short term solvency(current ratio) and its interest coverage ratio is also less than the competitor firm
4-
return on equity
Net income/total of equity
84.00%
38.33%
Net income
105000
115000
total of equity
125000
300000
5-
return on assets
EBIT/total of assets
29.50%
29.44%
EBIT
236000
235500
total of assets
800000
800000
Company WAYDE is producing higher return to equity shareholders in comparison to its competitor because it is using more leverage in its capital structure and due to high leverage it is producing high returns to equity shareholders
Both companies are managing its assets more effectively as retirn on total assets are almost equal
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