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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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