Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and

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?

Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.

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.

(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?

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.

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 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.
Answeryesno Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense.
Answernoyes Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase 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 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.

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.

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 27,892 27,667 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 33,768 33,346 29,848 3,445 2,180 1,976 Other income (expenses), net (449) (121) 43 Operating profit 2,996 2,059 2,019 Interest expense 370 425 487 Earnings before taxes 2,626 1,634 1,532 Income tax expense 801 368 479 Net earnings $ 1,825 $ 1,266 $ 1,053

Explanation / Answer

(a) Current ratio = current asset/ current liabilites

2004 : 8993/8566 = 1.0498

2005 : 10769/9428 = 1.1422

Quick ratio = ( cash + short term investments + receivables)/ Current liabilities

2004 = (1100 + 396 + 4094) / 8566 = .6525

2005 = (2484 + 429 + 4579) / 9428= .7946

Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004?

Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.

B) total liabilities to equity

2004 : 18573/7021 = 2.645

2005 : 20117/7867 = 2.557

Long term debt to equity

2004 : 5224/7021 = 0.744

2005 : 4784/7867 = 0.608

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.

Please ask C and D separately, as there are too many parts

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