Question

Requirements 1. Compute the following ratios for 2018 and 2017: a. Current ratio b. Cash ratio c. Times-interest-earned ratio d. Inventory turnover e. Gross profit percentage f. Debt to equity ratio g. Rate of return on common stockholders' equity h. Earnings per share of common stock I. Pricelearnings ratio 2. Decide (a) whether Tanfield's ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased. Print Done

Answer 1

Requirement 1: Compute the ratios as follows

	Particulars		Formula		2018	2017
a	Current Ratio	=	Current Assets	=	$363,000	$377,000
			Current Liabilities		$228,000	$247,000
				=	1.59	1.53
b	Cash Ratio	=	Cash + Cash Equivalents	=	$92,000 + $0	$91,000 + $0
			Current Liabilities		$228,000	$247,000
				=	0.40	0.37
c	Times-Interest-Earned Ratio	=	Income from Operations	=	$95,000	$74,000
			Interest Expense		$13,000	$14,000
				=	7.31	5.29
d	Inventory Turnover	=	Cost of goods sold	=	$234,000	$216,000
			Average Inventory		($143,000 + $161,000) ÷ 2	($161,000 + $204,000) ÷ 2
				=	1.54	1.18
e	Gross Profit Percentage	=	Gross Profit	=	$233,000	$210,000
			Net Sales Revenue		$467,000	$426,000
				=	49.89%	49.30%
f	Debt to equity ratio	=	Total liabilities	=	$346,000	$347,000
			Total stockholders' equity		($110,000 + $123,000)	($110,000 + $99,000)
				=	1.48	1.66
g	Return on Common Stock	=	Net income - Preferred Dividend	=	$60,000 − ($110,000 × 6%)	$35,000 − ($110,000 × 6%)
			Average Common Stock		($123,000 + $99,000) ÷ 2	($99,000 + $91,000) ÷ 2
				=	48.11%	29.89%
h	Earnings per Share	=	Net income - Preferred Dividend	=	$60,000 − ($110,000 × 6%)	$35,000 − ($110,000 × 6%)
			Common Shares Outstanding		(9,000 + 8,000) ÷ 2	(8,000 + 8,000) ÷ 2
				=	$6.28	$3.55
i	Price/Earnings Ratio	=	Market price per Share	=	$113.04	$42.60
			Earnings Per Share		$6.28	$3.55
				=	17.99	12.00

Requirement 2a: The debt servicing ability of the company improved when compared to the previous year because current ratio, cash ratio and times-interest-earned ratios improved when compared to the previous year ratios. The inventory turn over ratio of the company also improved when compared to the previous as a result the gross profit percentage also improved when compared to the previous year.

Requirement 2b: The attractiveness of investment in the stock increased when compared to the previous year because the earnings per share increased.