Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and
ID: 2542280 • Letter: C
Question
Compute and Interpret Liquidity, Solvency and Coverage Ratios
Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.
(a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.)
2005 current ratio = Answer
2004 current ratio = Answer
2005 quick ratio = Answer
2004 quick ratio = Answer
(b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places.)
2005 total liabilities-to-stockholders' equity = Answer
2004 total liabilities-to-stockholders' equity = Answer
2005 total debt-to-equity = Answer
2004 total debt-to-equity = Answer
(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. (Round your answers to two decimal places.)
2005 times interest earned = Answer
2004 times interest earned = Answer
2005 cash from operations to total debt = Answer
2004 cash from operations to total debt = Answer
2005 free operating cash flow to total debt = Answer
2004 free operating cash flow to total debt = Answer
Explanation / Answer
A. Computation of Current Ratio and quick ratio for 2005 and 2004
Current Ratio = Current Assets / Current Liabilities
2005
2004
Total current assets
10,449
8.673
Total Current Liabilities
9,428
8,566
Current Ratio
=10449/9428
=8673/8566
=1.11 : 1
=1.01 : 1
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Current Assets – Inventory – Deffered Tax Assets
2005
2004
Total current assets
10,449
8.673
Total Current Liabilities
9,428
8,566
Inventory
1,961
1,824
Deferred income taxes
861
982
(i) Quick Assets
=10,449-1961-861
=8673-1824-982
=7627
=5867
(ii) Quick Ratio
=7627/9428
=5867/8566
=0.81 : 1
=0.68:1
B. Computation of Total Liabilities to Stock holders’ equity ratio and Total debt to Stockholers’ equity ratio
Total liabilities to Stockholders’ equity ratio = Total Liabilities / Stock holders’ equity
Total liabilities = Total liabilities and stock holders’ equity – stock holders’ equity
2005
2004
Total liabilities and Stockholders’ equity
27,664
25,274
Stock holders’ equity
7,867
7,021
Total liabilities
=27,664-7,867
=25274-7021
=19,797
=18,253
Total liabilities to stockholders’ equity ratio
=19797/7867
=18253/7021
=2.52 : 1
=2.60:1
Total Debt to stockholders’ equity ratio = Total Debt / Stockholders equity
Total Debt = Long Term Debt
2005
2004
Long Term Debt
4,664
5,264
Stock holders’ equity
7,867
7,021
Total Debt to Stockholders’ equity
=4664/7867
=5264/7021
=0.59 : 1
=0.75 : 1
C. Computation of Interest Earned Ratio
Interest Earned Ratio= Net Profit Before Interest, Taxes and Dividend / Total Interest Expense
(this ratio tells how many times interest expense is covered by Net Profit )
2005
2004
Net profit before interest, taxes and dividend (operating profit)
3,006
2,089
Interest expense
370
425
Interest earned ratio
=3006/370
=2089/425
8.12 times
4.92 times
2005
2004
Total current assets
10,449
8.673
Total Current Liabilities
9,428
8,566
Current Ratio
=10449/9428
=8673/8566
=1.11 : 1
=1.01 : 1
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