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(Figures in s millions) Net sales Cost of goods sold Other expenses Depreciation

ID: 2809803 • Letter: #

Question

(Figures in s millions) Net sales Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest expense Income before t Taxes (at 30%) Net income Dividends s 12,500 3,710 4,112 2,308 $ 2,370 650 $ 1,720 516 $ 1,204 $ 806 ax BALANCE SHEET (Figures in $millions) End of Year Start of Year Assets 82 151 2,350 203 897 $3,098 3,601 19,845 4,1463,700 $ 27,14727,146 Cash and marketable securities Receivables Inventories Other current assets 2,032 152 832 Total current assets Net property, plant, and equipment Other long-term assets 19,903 Total assets Liabilities and shareholders' equity $2,494 $2,970 1,538 752 $ 4,654 5,260 8,086 6,079 7,721 $ 27,147 27,146 Payables Short-term debt Other current liabilities 1,384 776 Total current liabilities Long-term debt and leases Other long-term liabilities Shareholders' equity 8,761 6,108 7,624 Total liabilities and shareholders' equity Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Explanation / Answer

Solution :

As required only the following ratios are being solved:

b. Return on Equity ( use average balance sheet figures )

c. Return on Capital ( use average balance sheet figures )

m. Quick ratio ( use end -of - year balance sheet figures )

b. Return on Assets ( use average balance sheet figures )

Return on Assets is calculated Using the following formula:

= Net Income after Tax / Average Assets

As per the Information given in the question we have

Net Income after Tax = $ 1,204 million

Average assets = (Assets at start of year + Assets at the end of the year ) / 2

                       = ( $ 27,147 + $ 27,146 ) / 2 = ( $ 54,293/ 2 ) = $ 27146.50

Thus Return on Assets = $ 1,240 / $ 27,146.50 = 0.044352 = 4.44 %

c. Return on Capital employed

The formula for calculating Return on Capital employed is as follows

= EBIT / Capital employed

As per the information given in the question we have

EBIT = $ 2,370 Million

Capital employed = Average Assets - Average Current Liabilities

Average Assets = (Assets at start of year + Assets at the end of the year ) / 2

                       = ( $ 27,147 + $ 27,146 ) / 2 = ( $ 54,293/ 2 ) = $ 27146.50 million

Average Current liabilities = (Current liabilities at start of year + Current liabilities at the end of the year ) / 2

= ( 4,654 + 5,260 ) / 2 = $ 4,957 million

Average Capital employed = $ 27,146.50 - $ 4,957 = $ 22,189.50 million

Thus, Return on capital employed = $ 2,370 / $ 22,189.50 = 10.68 %

m. Quick Ratio

The formula for calculation of Quick Ratio =

(Cash and Marketable securities + Accounts receivables) / Current liabilities

As per the Information given in the question we have

Cash and Marketable securities = 151   ; Accounts receivables = 2350   ; Current liabilities = 5260

Applying the above values in the formula we have

= ( $ 151 + $ 2,350 ) / $ 5,260 = $ 2,501/ $ 5,260 = 0.475475

Thus Quick ratio = 0.4755 = 0.48