Question

a) Use your knowledge of balance sheets and ratio analysis to complete the following abbreviated balance sheet.

The relevant information you have is: current ratio = 2 and debt/equity ratio = 1

Balance sheet item	Value
Current assets	40,000
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Owner equity	50,000
Total liabilities and equity

b) Calculate any other financial ratios given the above information.

c) If you are an agricultural loan officer, would you approve a loan to the farmer? Explain.

d) A business has financed its assets with 70% debt. It has ROE of 8% and COFD of 4%, what would be ROA?

Answer 1

A)

Total Liabilities would be 50,000 as debt equity ratio is 1.

Now based on Current Ratio and given current assets of 40,000 current liability would come up to 20,000 thus the non-current liability would be 30,000 (50,000-20,000). This will result into total liabilities and equity for 100,000, which would also be the total of asset side resulting into non current asset of 60,000 (100,000-40,000)

B)

Other financial ratios: 1) Debt Ratio -  Total liabilities / Total Assets = 50,000/100,000 = 0.5

C)

As an agricultural loan officer I would approve loan of farmer as debt ratio is less then 1 which indicates that assets are double the debt.

D)

The ROA would be net Income / End of period assets.