Question

Just Dew It Corporation reports the following balance sheet information for 2017 and 2018.

  

JUST DEW IT CORPORATION 2017 and 2018 Balance Sheets
Assets									Liabilities and Owners’ Equity
	2017				2018					2017				2018
Current assets									Current liabilities
Cash	$	7,950			$	11,800			Accounts payable	$	40,500			$	45,800
Accounts receivable		23,550				29,000			Notes payable		14,850				20,800
Inventory		36,750				47,000
Total	$	68,250			$	87,800			Total	$	55,350			$	66,600
									Long-term debt	$	30,000			$	24,000
									Owners’ equity
									Common stock and paid-in surplus	$	42,000			$	42,000
									Retained earnings		172,650				267,400
Net plant and equipment	$	231,750			$	312,200			Total	$	214,650			$	309,400
Total assets	$	300,000			$	400,000			Total liabilities and owners’ equity	$	300,000			$	400,000
Based on the balance sheets given for Just Dew It:      d. Calculate the NWC to total assets ratio for each year. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) e. Calculate the debt-equity ratio and equity multiplier for each year. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) f. Calculate the total debt ratio and long-term debt ratio for each year. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

2017:

NWC Ratio = Net Working Capital / Total Assets
NWC Ratio = (Current Assets - Current Liabilities) / Total Assets
NWC Ratio = ($68,250 - $55,350) / $300,000
NWC Ratio = 4.30%

Debt-Equity Ratio = Total Liabilities / Total Owners’ Equity
Debt-Equity Ratio = (Current Liabilities + Long-term Debt) / Total Owners’ Equity
Debt-Equity Ratio = ($55,350 + $30,000) / $214,650
Debt-Equity Ratio = 0.40 times

Equity Multiplier = 1 + Debt-Equity Ratio
Equity Multiplier = 1 + 0.40
Equity Multiplier = 1.40 times

Total Debt Ratio = Total Liabilities / Total Assets
Total Debt Ratio = (Current Liabilities + Long-term Debt) / Total Assets
Total Debt Ratio = ($55,350 + $30,000) / $300,000
Total Debt Ratio = 0.28 times

Long-term Debt Ratio = Long-term Debt / Total Assets
Long-term Debt Ratio = $30,000 / $300,000
Long-term Debt Ratio = 0.10 times

2018:

NWC Ratio = Net Working Capital / Total Assets
NWC Ratio = (Current Assets - Current Liabilities) / Total Assets
NWC Ratio = ($87,800 - $66,600) / $400,000
NWC Ratio = 5.30%

Debt-Equity Ratio = Total Liabilities / Total Owners’ Equity
Debt-Equity Ratio = (Current Liabilities + Long-term Debt) / Total Owners’ Equity
Debt-Equity Ratio = ($66,600 + $24,000) / $309,400
Debt-Equity Ratio = 0.29 times

Equity Multiplier = 1 + Debt-Equity Ratio
Equity Multiplier = 1 + 0.29
Equity Multiplier = 1.29 times

Total Debt Ratio = Total Liabilities / Total Assets
Total Debt Ratio = (Current Liabilities + Long-term Debt) / Total Assets
Total Debt Ratio = ($66,600 + $24,000) / $400,000
Total Debt Ratio = 0.23 times

Long-term Debt Ratio = Long-term Debt / Total Assets
Long-term Debt Ratio = $24,000 / $400,000
Long-term Debt Ratio = 0.06 times