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.)

Phone Corporation

1. Return on equity, (Use AVG balance sheet figures %?)

= Net Income/Equity * 100

= $1,225/$10,672.5 * 100

= 11.48%

2. Return on assets (Use AVg balance sheet figures %?)

= Net Income/Average Assets

= $1,225/$27,938.5 * 100

= 4.38

3. Return on Capital Use AVg balance sheet figures      %?

= Net Income/Liabilities + Equity * 100

= $1,225/$27,938.50 * 100

= 4.38%

4. Day in Inventory use start of year balance sheet            Days?

= Average Inventory/Cost of goods sold * 365

= $212/$4,310 * 365

= 17.95 days

5. Inventory Turnover use start of year balance sheet

= Cost of goods sold/Average Inventory

$4,310/$212

= 20.33 times

6. Average collection period use start of year balance sheet       Days?

= Average Accounts Receivable/Net Sales * 365

= $2,632/$13,600 * 365

= 70.64 days

7. Operating Profit margin                                                            %?

= Net Income/Sales * 100

= $1,225/$13,600 * 100

= 9%

8. Long term debt ratio (Use end of the year balance sheet):

= Long-term Debts/Total Assets

= $12,137/$27,758

= 0.44

9. Total debt ratio (Use end of the year balance sheet):

= Total Liabilities/Total Assets

= $17,637/$27,758

= 0.64

10. Time interest earned:

= EBIT/Interest Expense

= $2,460/$710

= 3.46 times

11. Current ratio (Use end of the year balance sheet):

= Current Assets/Current Liabilities

= $3,973/$5,500

= 0.72

12. Quick ratio (Use end of the year balance sheet):

= (Current Assets - Inventory)/Current Liabilities

= ($3,973 - 263)/ $5,500

= 0.67

Explanation:

a) Data:

Phone Corporation Income Statement

(Figures in $ millions)

Net sales                    $13,600

Cost of goods sold        4,310

Other expenses            4,162

Depreciation                2,668

Earnings before interest

 and taxes (EBIT)    $2,460

Interest expense             710

Income before tax     $1,750

Taxes (at 30%)               525

Net income            $1,225

Dividends $906

BALANCE SHEET

(Figures in $ millions)

a) Averages Balance Figures:

                                                                         End     Start     Average

                                                                        Year     Year     Figures

Assets        

Cash and marketable securities                     $94       $163         $128.5

Receivables                                                   2,632     2,590      $2,611

Inventories                                                        212         263       $237.5

Other current assets                                       892         957       $924.5 

Total current assets                                    $3,830    $3,973    $3,901.5

Net property, plant, and equipment          20,023    19,965   $19,994

Other long-term assets                                4,266      3,820    $4,043 

Total assets                                                $28,119  $27,758  $27,938.5

Liabilities and shareholders’ equity        

Payables                                                      $2,614    $3,090    $2,852

Short-term debt                                             1,444       1,598      $1,521

Other current liabilities                                  836           812        $824

Total current liabilities                               $4,894    $5,500     $5,197  

Long-term debt and leases                         5,773      5,938     $5,855.5

Other long-term liabilities                           6,228       6,199      $6,213.5

Total long-term liabilities                          $12,001   $12,137    $12,069

Total liabilities                                          $16,895   $17,637    $17,266

Shareholders’ equity                                  11,224       10,121   $10,672.5

Total liabilities & shareholders’ equity    $28,119  $27,758  $27,938.5

b) Days in Inventory is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The ratio measures the number of days funds are tied up in inventory.

c) Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given time period.

d) The average collection period is calculated by dividing the average balance of accounts receivable by total net credit sales for the period and multiplying the quotient by the number of days in the period.

e) For lack of space, other ratios are equally defined by the formulas for calculating them.

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