Selected financial data for Surf City and Paradise Falls are as follows: 1-a. Ca

Question

Selected financial data for Surf City and Paradise Falls are as follows:

1-a. Calculate the debt to equity ratio for Surf City and Paradise Falls for the most recent year. (Do not round intermediate calculations. Round ratios answers to 2 decimal places. Enter dollar answer in millions. (i.e., $5,500,000 should be entered as 5.5))

2-a. Calculate the return on assets for Surf City and Paradise Falls. (Round your answers to 1 decimal place. Enter dollar answer in millions. (i.e., $5,500,000 should be entered as 5.5))

3-a. Calculate the times interest earned ratio for Surf City and Paradise Falls. (Round ratios answers to 1 decimal place. Enter dollar answer in millions. (i.e., $5,500,000 should be entered as 5.5))

($ in millions) Surf City Paradise Falls 2018 2017 2018 2017   Total assets $ 16,133 $ 14,922 $ 33,296 $ 34,121   Total liabilities 9,720 8,195   13,938 14,188   Total stockholders’ equity 6,413 6,727 19,358 19,933   Sales revenue $ 6,503 $ 14,616   Interest expense 318 408   Tax expense 44   Net income 568 2,324

Explanation / Answer

Debt Equity ratio = Total Debt / Equity

Surf City = 9720 / 6413 = 1.52

Paradise Falls = 13938 / 19358 = 0.72

2-a. Calculate the return on assets for Surf City and Paradise Falls.

Firstly calculate the average total assets = [ Assets (2018) + Assets (2017) ] / 2

Surf City = [ 16133 + 14,922 ] / 2 = 15527.5

Paradise Falls = [33296 + 34121] /2 = 33708.5

Return on Assets = Net Income / Average Assets * 100

Surf City = 568 / 15527.5 * 100 = 3.66 %

Paradise Falls = 2324 / 33708.5 * 100 = 6.89%

3-a. Calculate the times interest earned ratio for Surf City and Paradise Falls.

First we need to compute EBIT = earnings before interst and tax. For this add the interest and tax back to the net income given in the question. i.e EBIT = Net Income + Tax + Interest

Surf city = 568 + 0 + 318 = 886

Paradise city = 2324 + 44 + 408 = 2776

Times Interest Earned ratio = EBIT / Interest

Surf city = 886 / 318 = 2.77

Paradise city = 2776 / 408 = 6.80

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