Question

The following financial statements apply to Benson Company:

	Year 4				Year 3
Revenues
Net sales	$	211,000			$	176,600
Other revenues		8,300				6,300
Total revenues		219,300				182,900
Expenses
Cost of goods sold		125,100				101,600
Selling expenses		20,700				18,700
General and administrative expenses		10,500				9,500
Interest expense		1,800				1,800
Income tax expense		19,000				16,600
Total expenses		177,100				148,200
Net income	$	42,200			$	34,700
Assets
Current assets
Cash	$	4,500			$	6,800
Marketable securities		3,000				3,000
Accounts receivable		35,700				30,600
Inventories		101,300				94,400
Prepaid expenses		4,800				3,800
Total current assets		149,300				138,600
Plant and equipment (net)		105,100				105,100
Intangibles		20,800				0
Total assets	$	275,200			$	243,700
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities
Accounts payable	$	38,600			$	55,200
Other		15,200				15,700
Total current liabilities		53,800				70,900
Bonds payable		64,500				65,500
Total liabilities		118,300				136,400
Stockholders’ equity
Common stock (45,000 shares)		113,600				113,600
Retained earnings		43,300				(6,300	)
Total stockholders’ equity		156,900				107,300
Total liabilities and stockholders’ equity	$	275,200			$	243,700

Required
Calculate the following ratios for Year 3 and Year 4. Since Year 2 numbers are not presented do not use averages when calculating the ratios for Year 3. Instead, use the number presented on the Year 3 balance sheet.

a. Net margin. (Round your answers to 2 decimal places.)
b. Return on investment. (Round your answers to 2 decimal places.)
c. Return on equity. (Round your answers to 2 decimal places.)
d. Earnings per share. (Round your answers to 2 decimal places.)
e. Price-earnings ratio (market prices at the end of Year 3 and Year 4 were $5.96 and $4.80, respectively). (Round your intermediate calculations and final answers to 2 decimal places.)
f. Book value per share of common stock. (Round your answers to 2 decimal places.)
g. Times interest earned. Exclude extraordinary income in the calculation as they cannot be expected to recur and, therefore, will not be available to satisfy future interest payments. (Round your answers to 2 decimal places.)
h. Working capital.
i. Current ratio. (Round your answers to 2 decimal places.)
j. Quick (acid-test) ratio. (Round your answers to 2 decimal places.)
k. Accounts receivable turnover. (Round your answers to 2 decimal places.)
l. Inventory turnover. (Round your answers to 2 decimal places.)
m. Debt-to-equity ratio. (Round your answers to 2 decimal places.)
n. Debt-to-assets ratio. (Round your answers to the nearest whole percent.)

		year4	year3
a	net margin
b	return on investment
c	return on equity
d	earnings per share
e	price earnings ratio
f	book value
g	interest earned
h	working capital
i	current ratio
j	quick (acid test) ratio
k	accounts receivable turnover
l	inventory turnover
m	debt to equity ratio
n	debt to assets ratio

Answer 1

Answer of Part a:

For Year 3:

Net Margin = Net Income / Net Sales *100
Net Margin = 34,700 /$176,600 *100
Net Margin = 19.65%

For Year 4:

Net Margin = Net Income / Net Sales *100
Net Margin = $42,200 /$211,000 *100
Net Margin = 20%

Answer of Part c:

For Year 3:

Return on Equity = Net Income / Stockholders Equity *100
Return on Equity = $34,700 / $107,300 *100
Return on Equity = 32.34%

For Year 4:

Average Stockholders Equity = (Beginning Stockholders Equity + Ending Stockholders Equity) /2
Average Stockholders Equity = ($107,300 + $156,900) /2
Average Stockholders Equity = $132,100

Return on Equity = Net Income / Average Stockholders Equity *100
Return on Equity = $42,200 / $132,100 *100
Return on Equity = 31.95%

Answer of Part d:

Year 3:

Earnings per share = Net Income / No. of Common Stock Outstanding
Earnings per share = $34,700 / 45,000
Earnings per share = $0.77

Year 4:

Earnings per share = Net Income / No. of Common Stock Outstanding
Earnings per share = $42,200 / 45,000
Earnings per share = $0.94

Answer of Part e:

Year 3:

Price Earning Ratio = Market Price / EPS
Price Earning Ratio = $5.96 / $0.77
Price Earning Ratio = $7.74

Year 4:

Price Earning Ratio = Market Price / EPS
Price Earning Ratio = $4.80 / $0.94
Price Earning Ratio = $5.11