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Ch 1 Solution Problem 1- 8

# Ch 1 Solution Problem 1- 8 - UCLA Extension FIN 432 Problem...

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UCLA Extension FIN 432 Problem 1-8 Financial ratios for Chico Electronics: a. Acid-test ratio: (Cash + Accounts receivable) ÷ Total current liabilities (\$325 + \$3,599) ÷ \$3,945 = 0.99 Interpretation: The most liquid assets can adequately cover current liabilities b. Return on assets: [Net income + Interest expense (1-tax rate)] ÷ Average total assets [\$1,265 + \$78 (1 - .40)] ÷ [(\$4,792 + \$8,058) ÷ 2] = 20.4% Interpretation: Return on each dollar invested in assets (this return would seem to be good to very good) c. Return on common equity: (Net income - Preferred dividends) ÷ Average common equity [\$1,265 - \$45] ÷ [(\$2,868 - \$500 + \$3,803 - \$450) ÷ 2] = 42.7% Interpretation: Return on each dollar invested by equity holders (this return would seem to be excellent) d. Earnings per share: (Net income - Preferred dividends) ÷ Average common shares outstanding [\$1,265 - \$45] ÷ [(550 + 829) ÷ 2] = \$1.77 Interpretation: Net income earned per each share owned (difficult to assess this EPS value in isolation)

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Problem 1-8—continued e. Gross profit margin: (Net sales - Cost of goods sold) ÷ Net sales (\$12,065 - \$8,048) ÷ \$12,065 = 33.3%
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