Question

Here are simplified financial statements for Phone Corporation in a recent year:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	13,200
Cost of goods sold		4,110
Other expenses		4,072
Depreciation		2,548
Earnings before interest and taxes (EBIT)	$	2,470
Interest expense		690
Income before tax	$	1,780
Taxes (at 35%)		623
Net income	$	1,157
Dividends	$	866

  

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	90			$	159
Receivables		2,432				2,510
Inventories		192				243
Other current assets		872				937
Total current assets	$	3,586			$	3,849
Net property, plant, and equipment		19,983				19,925
Other long-term assets		4,226				3,780
Total assets	$	27,795			$	27,554
Liabilities and shareholders’ equity
Payables	$	2,574			$	3,050
Short-term debt		1,424				1,578
Other current liabilities		816				792
Total current liabilities	$	4,814			$	5,420
Long-term debt and leases		6,769				6,654
Other long-term liabilities		6,188				6,159
Shareholders’ equity		10,024				9,321
Total liabilities and shareholders’ equity	$	27,795			$	27,554

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.)

a.	Return on equity (use average balance sheet figures)		%
b.	Return on assets (use average balance sheet figures)		%
c.	Return on capital (use average balance sheet figures)		%
d.	Days in inventory (use start-of-year balance sheet figures)		days
e.	Inventory turnover (use start-of-year balance sheet figures)
f.	Average collection period (use start-of-year balance sheet figures)		days
g.	Operating profit margin		%
h.	Long-term debt ratio (use end-of-year balance sheet figures)
i.	Total debt ratio (use end-of-year balance sheet figures)
j.	Times interest earned
k.	Cash coverage ratio
l.	Current ratio (use end-of-year balance sheet figures)
m.	Quick ratio (use end-of-year balance sheet figures)

Need help!

Answer 1

Answer of Part a:

Average Equity = (Beginning Equity + Ending Equity)/2
Average Equity = ($9,321 + $10,024) / 2
Average Equity = $9,672.5

Return on Equity = Net Income / Average Equity *100
Return on Equity = $1,157 / $9,672.5 * 100
Return on Equity = 11.96%

Answer of Part b:

Average Assets = (Beginning Assets + Ending Assets)
Average Assets = ($27,554 + $27,795) / 2
Average Assets = $27,674.5

Return on Assets = [Net Income + Interest Expense * (1-tax rate)] / Average Assets * 100
Return on Assets = [$1,157 + $690 * (1-0.35)] / $27,674.5 * 100
Return on Assets = [$1,157 + $448.5] / $27,674.5 * 100
Return on Assets = $1,605.5 / $27,674.5 * 100
Return on Assets = 5.80%

Answer of Part c:

Average Capital = ($6,654 + $9,321 + $6,769 + $10,024) / 2
Average Capital = $16,384

Return on Capital = [Net Income + Interest Expense * (1-tax rate)] / Average Capital *100
Return on Capital = [$1,157 + $690 * (1-0.35)]/ $16,384 * 100
Return on Capital = [$1,157 + $448.5]/ $16,384
Return on Capital = $1,605.5 / $16,384
Return on Capital = 9.80%

Answer of Part d:

Days in Inventory = 365 days * Inventory / Cost of Goods Sold
Days in Inventory = 365 * $243 / $4,110
Days In Inventory = 21.58 days

Answer of Part e:

Inventory Turnover = Cost of Goods Sold / Inventory
Inventory Turnover = $4,110 / $243
Inventory Turnover = 16.91 times