Question

Question Four You and your sister are both CEO's of companies in the same industry CHEST Ltd and REST Ltd. Both companies were originally operated as a single family business but shortly after you joined the MBA program the business was divided into two companies. Your sister took over CHEST Ltd while you took over REST Ltd. During a recent family reunion your sister referred to the much larger return on equity to her stockholders than was the case in your company and suggested that you consider rearranging the method of financing your assets The statement of income for the year ended 31 December 2011 and statement of financial position as at 31 December 2011 are as shown below: CHEST LTD. REST LTD. 2,029,500 (29,500) 2,000,000 (1.225,000) 275,000 335,000 195,000 530.000 245,000 31.000 214,000 86.000 128,000 1,952,500 (22,500) 1,930,000 1.79,000) 751,000 305,750 Sales Sales returns Net sales Cost of goods sold Gross profit Selling expenses General Expenses Total operating expenses Operating Income Interest expense Income before income taxes Income taxes Net Income 175,250 481.000 270,000 10,500 259,500 103,500 156.000 Statement of Financial Position CHEST REST 62,500 ASSETS 65,000 775,000 810,000 25,000 Current Assets Plant Assets (Net) Intangible Assets Total Assets LIABILITIES Current Liabilities Non current liabilities Total Liabilities STOCKHOLDERS EQUITY Common stock (sh. 10 par) Retained Earnings Total Stockholders equity Total Liabilities and stockholders' equity 12,500 850,000 900000 40,000 25,000 310,000- 100.000 335,000 140.000 100,000 400,000 415.000 360.000 d515.000 760,000 850.000 900,000

Answer 1

As per rules I am answering the first 4 subparts of the question

1: ratio of plant assets to long-term liabilities= total plant assets/long-term liabilities

Chest

= 775000/310000

= 2.5

Rest

= 810000/100000

= 8.1

2: ratio of stockholders’ equity to liabilities= stockholders’ equity/ total liabilities

Chest

= 515000/335000 = 1.54

Rest

= 760000/140000 = 5.43

3: ratio of net sales to assets= net sales/ Average total assets

Chest

= 2000000/((850000+800000)/2)

=2.42

Rest

= 1930000/ ((900000+860000)/2)

=2.19

4: rate earned on total assets= net income/ average total assets

Chest

= 128000/((850000+800000)/2)

=15.52%

Rest

= 156000/ ((900000+860000)/2)

=17.73%