Exhibit 4.1
The balance sheet and income statement shown below are for Koski
Inc. Note that the firm has no amortization charges, it does not
lease any assets, none of its debt must be retired during the next
5 years, and the notes payable will be rolled over.
Balance Sheet (Millions of $) | ||||
Assets |
2018 |
|||
Cash and securities |
$3,000 |
|||
Accounts receivable |
15,000 |
|||
Inventories |
18,000 |
|||
Total current assets |
$36,000 |
|||
Net plant and equipment |
$24,000 |
|||
Total assets |
$60,000 |
|||
Liabilities and Equity | ||||
Accounts payable |
$18,630 |
|||
Accruals |
8,370 |
|||
Notes payable |
6,000 |
|||
Total current liabilities |
$33,000 |
|||
Long-term bonds |
$9,000 |
|||
Total liabilities |
$42,000 |
|||
Common stock |
$5,040 |
|||
Retained earnings |
12,960 |
|||
Total common equity |
$18,000 |
|||
Total liabilities and equity |
$60,000 |
|||
Income Statement (Millions of $) | 2018 | |||
Net sales |
$84,000 |
|||
Operating costs except depreciation |
78,120 |
|||
Depreciation |
1,680 |
|||
Earnings before interest and taxes (EBIT) |
$4,200 |
|||
Less interest |
900 |
|||
Earnings before taxes (EBT) |
$3,300 |
|||
Taxes |
1,320 |
|||
Net income |
$1,980 |
|||
Other data: | ||||
Shares outstanding (millions) |
500.00 |
|||
Common dividends (millions of $) |
$693.00 |
|||
Int rate on notes payable & L-T bonds |
6% |
|||
Federal plus state income tax rate |
40% |
|||
Year-end stock price |
$47.52 |
Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.
a. |
45.45% |
|
b. |
38.18% |
|
c. |
44.09% |
|
d. |
39.09% |
|
e. |
39.55% |
Solution:
The formula for calculating the total debt to total capital ratio
= Total Debt / Total Capital
= Total Debt / ( Total Debt + Common Equity )
As per the information given in the question we have
Total Debt = Notes Payable + Long – term bonds
= $ 6,000 + $ 9,000
= $ 15,000
Thus Total Debt = $ 15,000
Further as per the information given in the question we have
Common Equity = Common Stock + Retained Earnings
= $ 5,040 + $ 12,960
= $ 18,000
Thus Common Equity = $ 18,000
Thus we have
Total Debt = $ 15,000 ; Common Equity = $ 18,000
Applying the above information in the formula we have
= $ 15,000 / ( $ 15,000 + $ 18,000 )
= $ 15,000 / $ 33,000
= 0.454545
= 45.4545 %
= 45.45 % ( when rounded off to two decimal places )
Thus the total debt to total capital ratio = 45.45 %
The solution is Option a. 45.45 %
Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc. Note that...
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Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets Cash and securities Accounts receivable Inventories Total current assets o Net plant and equipment Total assets Liabilities and Equity Accounts payable Accruals Notes payable Total current...
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