Ratios: Consider Advisability of Incurring Long-Term Debt
At the end of the year, the following information was obtained from the accounting records of Solar Systems, Inc.:
Sales (all on credit) | $4,800,000 |
Cost of goods sold | 3,000,000 |
Average inventory | 420,000 |
Average accounts receivable | 380,000 |
Interest expense | 50,000 |
Income tax expense | 80,000 |
Net income | 280,000 |
Average investment in assets | 2,600,000 |
Average stockholders’ equity | 1,000,000 |
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. Solar Systems has an opportunity to obtain a long-term loan at an annual interest rate of 8 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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