Chapter 2: 4DQ (page 74)
What advantage does the fixed charge coverage ratio offer over simply using times interest earned?
The fixed charges coverage ratio is computed to measure the company’s ability to meet all the fixed financial liabilities rather than just interest expenses.
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Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows
| Sales | \( 2790000 |
| Cost of goods sold | 1790000 |
| Gross profits | \) 1000000 |
| Selling and administrative expenses | 302000 |
| Operating profits | \( 698000 |
| Interest Expense | 54800 |
| Income before tax | \) 643200 |
| Taxes 30% | 192960 |
| Income after tax | $ 450240 |
b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?
Arrange the following income statement items so they are in the proper order of an income statement:
Taxes | Earning per share |
Share Outstanding | Earning before taxes |
Interest Expense | Cost of goods sold |
Depreciation Expense | Earning after taxes |
Preferred Stcok dividends | Earning available to common stockholders |
Sales | Selling and administrative expense |
Gross profit |
The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.
Stud Clothier | |||
Balance sheet 20X1 | |||
Assets | Liabilities and Equity | ||
Cash | \)60,000 | Account payable | \(220,000 |
Account receivable | 240,000 | Accrued taxes | 30,000 |
Inventory | 350,000 | Bonds payable (long term) | 150,000 |
Plant and equipment | 410,000 | Common stock | 80,000 |
Paid in capital | 200,000 | ||
Retained earnings | 380,000 | ||
Total assets | \)1,060,000 | Total LIbilities and Equity | $1,060,000 |
Compute the following:
e. Average collection period.
The Holtzman Corporation has assets of \(400,000, current liabilities of \)50,000, and long-term liabilities of \(100,000. There is \)40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $22,000 in earnings available to common stockholders and
Holtzman’s stock has a P/E of 18 times earnings per share, what is the current
price of the stock?
c. What is the ratio of market value per share to book value per share?
Why is trend analysis helpful in analyzing ratios?
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