Problem

Ratios; Consider Advisability of Incurring Long-Term DebtAt the end of the year, the follo...

Ratios; Consider Advisability of Incurring Long-Term Debt

At the end of the year, the following information was obtained from the accounting records of Harrison Electronics, Inc.

Sales (all on credit)

$2,750,000

Cost of goods sold

1,781,000

Average inventory

375,000

Average accounts receivable

282,000

Interest expense

45,000

Income tax expense

84,000

Net income

159,000

Average investment in assets

1,800,000

Average stockholders’ equity

895,000

Instructions

a. From the information given, compute the following:

1. Inventory turnover.

2. Accounts receivable turnover.

3. Total operating expenses.

4. Gross profit percentage.

5. Return on average stockholders’ equity.

6. Return on average assets.


b. Harrison Electronics has an opportunity to obtain a long-term loan at an annual interest rate of 10 percent and could use this additional capital at the same rate of profitability as indicated by the given data. Would obtaining the loan be desirable from the viewpoint of the stockholders? Explain.

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