384 436 1,280 6,748 Accounts payable Accounts receivable Accumulated depreciatio

Question

384 436 1,280 6,748 Accounts payable Accounts receivable Accumulated depreciation Cash & equivalents Common stock Cost of goods sold 6,632 1,120 n.a. n.a. n.a. n.a. 1,026 n.a. 1,184 1,500 Common stock dividends paid Interest expense 140 1,014 Addition to retained earnings Long-term debt Notes payable Gross plant &equipment; Retained earnings Sales Other current liabilities Tax rate Market price per share - year end Number of shares outstanding 812 230 10,260 3,062 10,000 2.478 n.a. 116 34% n.a. S 19.80 S 17.50 500 million 500 million a. Interest coverage ratio (Assume that year 1 EBIT was 1,297 and year 1 interest expense was 120.) Year 2 interest coverage ratio Year 1 interest coverage ratio b. Average collection period (Assume that the accounts receivable balance was 950 on December 31 of the previous year and that year 1 sales were 2,700.) Year 2 ACP Year 1 ACP days days c. Current ratio Year 2 current ratio Year 1 current ratio d. Quick ratio Year 2 quick ratio Year 1 quick ratio

Explanation / Answer

Req A: EBIT for Year 1 = $ 1297 (given) EBIT for Year 2: Addition to Retained earnings 602 (It is only after charging interest and tax) Add: tax@34% 310 (602/66*34) Add: Interest Expense 140 EBIT for Year 2: 1052 Interest Expense: Year 1: 120 Year 2: 140 Interest Coverage ratio = EBIT / Interest expense Year 2 Interest Coverage rattio = 1052/140   = 7.514 Year 1 Interest coverage ratio = 1297/120 = 10.808 Req B: Sales Year 2 3018 Year 1 2700 Average Accounts receivables = (Beginning Accounts receivable+Ending Accounts recievable)/2 Year 2 (830+1280)/2 = 1055 Year1(950+830)/2 = 890 Average collection period = Number of working days in year * Avrage accounts receivable/ Net credit sales Year 2 ( 365*1055 /3018)= 127.6 days Year 1(365*890/2700) = 120.3 days ReqC: Current Assets = Cash equivalents+Accounts recievable+Inventory Year 2 (224+1280+1014) = 2518 Year 1(128+830+1026) = 1984 Current Liabilities =Accounts payable+Other current liabilities Year 2(436+116) = 552 Year 1 (384+96)= 480 Current ratio = Current Assets/Current liabilities Year 2 Current ratio ( 2518/552)= 4.56 Year 1 Current ratio (1984/480) = 4.13 ReqD: Quick Assets= Cash Equivalent +Accounts Recievable Year 2(224+1280) = 1504 Year 1(128+830)= 958 Quick Asset ratio = Quick Assets/Current Liabilities Year 2(1504/552)= 2.72 Year 1(958/480)= 1.996

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