Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and
ID: 2771966 • 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
Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004?
The current ratio has increased while the quick ratio has decreased in the period from 2004 to 2005, which suggests the company has a shortage of liquid assets.
Both the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid.
The current ratio has decreased while the quick ratio has increased in the period from 2004 to 2005, which suggests the company has a shortage of current assets.
Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.
(b) Compute total liabilities-to-equity ratios and long-term debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places. For long-term debt-to-equity calculations, use the debt-to-equity ratio.)
2005 total liabilities-to-stockholders' equity = Answer
2004 total liabilities-to-stockholders' equity = Answer
2005 long-term debt-to-equity = Answer
2004 long-term debt-to-equity = Answer
Which of the following best describes the company's total liabilities-to-equity ratios and long-term debt-to-equity ratios for 2005 and 2004?
Both the total liabilities-to-equity and long-term debt-to-equity ratios have decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.
The total liabilities-to-equity ratio has decreased while the long-term debt-to-equity ratio has increased in the period from 2004 to 2005, which suggests the company has decreased the use of short-term debt financing.
The total liabilities-to-equity ratio has increased while the long-term debt-to-equity ratio has decreased in the period from 2004 to 2005, which suggests the company has increased the use of short-term debt financing.
Both the total liabilities-to-equity and long-term debt-to-equity ratios have increased from 2004 to 2005. These increases suggest that the company is less solvent.
(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
Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total debt ratios for 2005 and 2004? (Select all that apply)
Answernoyes Lockheed Martin's free operating cash flow to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.
Answernoyes Lockheed Martin's cash from operations to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.
Answernoyes Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense.
Answernoyes Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense.
(d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet its debt obligations?
Lockheed Martin's long-term debt-to-equity is very low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt.
Lockheed Martin's quick ratio is very low, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash.
Lockheed Martin's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its use of equity financing.
Lockheed Martin's times interest earned ratio is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.
Income Statement Year Ended December 31 (In millions) 2005 2004 2003 Net sales Products $ 31,518 $ 30,202 $ 27,290 Service 5,695 5,324 4,534 37,213 35,526 31,824 Cost of sales Products 27,852 27,627 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 33,728 33,306 29,848 3,485 2,220 1,976 Other income (expenses), net (449) (121) 43 Operating profit 3,036 2,099 2,019 Interest expense 370 425 487 Earnings before taxes 2,666 1,674 1,532 Income tax expense 841 408 479 Net earnings $ 1,825 $ 1,266 $ 1,053Explanation / Answer
a. Current Assets 2004 = 9037
Current Assets 2005 = 10369
Current Liabilities 2004 = 8566
Current Liabilities 2005 = 9428
Current Ratio 2004 = Current Assets 2004/Current Liabilities 2004
= 9073/8566 =1.06
Current Ratio 2005 = Current Assets 2005/Current Liabilities 2005
= 10369/9428 = 1.10
Quick Ratio 2004 = (current assets 2004 - inventories 2004 - deferred taxes 2004)/current liabilities 2004
= 0.72
Qucik Ratio 2005 = (current Assets 2005 - inventories 2005 - deferred taxes 2005)/current liabilities 2005
= 0.80
Both the ratios have increased. the company is fairly liquid.
b. 2005 total liabilities-to-stockholders' equity = 19717/7867 = 2.5 (Subtract the total stock holders equity from the total liabilities and stock holders equity figure to get the total liabilities figure from the balance sheet. Divide that by the stock holders equity to get the answer)
2004 total liabilities-to-stockholders' equity = 18653/7021 = 2.65 (similar explanation as above)
2005 long-term debt-to-equity = 4704/7867 = 0.60 (use the long term debt figure from the balance sheet and divide that by the total stock holders equity figure from the balance sheet)
2004 long-term debt-to-equity = 5064/7021 = 0.72 (similar explanation as above)
Both the total liabilities-to-equity and long-term debt-to-equity ratios have decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.
c.
2005 times interest earned = 3036/370 = 8.2 (Divide the operating profit by the interest expense from the profit and loss statement)
2004 times interest earned = 2099/425 = 4.93 (similar explaination as above)
2005 cash from operations to total debt = 3194/(4704+202) = 0.65 (Divide the operating cash flow figure from cash flow sheet by the summation of long term debt and current maturity of long term debt figure from the balance sheet)
2004 cash from operations to total debt = 2924/(5064+15) = 0.58 (similar explainaton as above)
2005 free operating cash flow to total debt = 904/(4704+202) = 0.18 (divide the net increase in cash figure from the cash flow statement by the total debt as explained above)
2004 free operating cash flow to total debt = 170/(5064+15) = 0.03 (similar explaination as above)
Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense.
Lockheed Martin's cash from operations to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.
d. Lockheed Martin's times interest earned ratio is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.
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