Question

Problem 2 (88 points) You have just been hired as a financial analyst for Tobia Company. Your boss has asked you to perform a comprehensive analysis of the company's financial statements, including comparing Tobia's performance to its major competitors. The company has provided the following financial data Year 1 Balance Sheet December 31, Year 2 and Year 1 Assets Year 2 Current assets: Cash $ 201,000 Accounts receivable, net 236,000 Inventory 158,000 Prepaid expenses 96,000 Total current assets 691,000 Plant and equipment, net 842,000 Total assets $ 1,533,000 $ 110,000 200,000 190,000 90,000 500,000 920,000 S 1,510,000 $ $ Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Bonds payable Total liabilities Stockholders' equity: Common stock, $3 par value Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities & stockholders' equity 173,000 36,000 88,000 297,000 170,000 467,000 150,000 40,000 90,000 280,000 170,000 450,000 210,000 60,000 796,000 1,066,000 $ 1,533,000 210,000 60,000 790,000 1,060,000 $ 1,510,000 $ Income Statement For the Year Ended December 31, Year 2 Sales (all on account) Cost of goods sold Gross margin Operating expenses Net operating income Interest expense Net income before taxes Income taxes (35%) Net income 1,410,000 850,000 560,000 525,077 34,923 16,000 18,923 6,623 12,300

Answer 1

Answer a.

Times Interest Earned Ratio = Net Operating Income / Interest Expense
Times Interest Earned Ratio = $34,923 / $16,000
Times Interest Earned Ratio = 2.18

Answer b.

Debt-to-Equity Ratio = Total Liabilities / Total Stockholders’ Equity
Debt-to-Equity Ratio = $467,000 / $1,066,000
Debt-to-Equity Ratio = 0.44

Answer c.

Gross Margin Percentage = Gross Margin / Sales
Gross Margin Percentage = $560,000 / $1,410,000
Gross Margin Percentage = 0.3972 or 39.72%

Answer d.

Average Total Assets = ($1,533,000 + $1,510,000) / 2
Average Total Assets = $1,521,500

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $12,300 / $1,521,500
Return on Total Assets = 0.0081 or 0.81%

Answer e.

Average Stockholders’ Equity = ($1,066,000 + $1,060,000) / 2
Average Stockholders’ Equity = $1,063,000

Return on Equity = Net Income / Average Stockholders’ Equity
Return on Equity = $12,300 / $1,063,000
Return on Equity = 0.0116 or 1.16%