P-7-1

CASH BASIS
TIE = EBIT TIE = EBIT+DA
INTEREST INTEREST
TIE =
CASH BASIS
12452+4311+5059 TIE = 21822+40000
TIE = 4311 4311

CASH BASIS
TIE = 21822 TIE = 61822
4311 4311
CASH BASIS
TIE = 5.0619 Times TIE = 14.34 Times

P-7-2

TIE = EBIT FCC = EBIT+LP

INTEREST I+LP

TIE = 735 FCC = 735+50

60 60+50
TIE = 12.25 Times
FCC = 785
110
FCC = 7.136x

P-7-3
TIE = EBIT FCC = EBIT+LP
INTEREST I+LP

TIE = 36+16 FCC = 52+50

16 16+50

TIE = 52 FCC = 102

16 66
TIE = 3.25x FCC = 1.545x
 7 -4

Total Liabilities $174,979

a. Debt Ratio = = = 41.2%
Total Assets $424,201

Total Liabilities $174,979

b. Debt/Equity Ratio = = = 70.2%
Stockholders' Equity $249,222

c. Debt to Tangible Net Worth

Total Liabilities = 174,979 = 174,979 = 70.9%

Tangible Net Worth 249,222 - 2,324 246,898

d. Kaufman Company has financed over 41% of its assets by the use of funds from outside creditors.
The Debt/Equity Ratio and the Debt to Tangible Net Worth Ratio are over 70%. Whether these ratios
are reasonable depends upon the stability of earnings.

P-7-5

Ratio Transaction TIE DR D/ER DTNW

Purchase of buildings financed by mortgage --- + + +
Purchase of inventory on short-term loan at1% over prime rate. - + + +
Declaration and payment of cash dividend. 0 + + +
Declaration and payment of stock dividend. 0 0 0 0
Firm increases profits by cutting cost of sales. + - - -
Appropriation of retained earnings. 0 0 0 0
Sale of common stock. 0 - - -
Repayment of long-term bank loan. + - - -
Conversion of bonds to common stock outstanding + - - -
Sale of inventory at greater than cost + - - -

P-7-6

PART A:

Arodex Company demonstrates a sound and improving long-term debt position. Times interest earned has
increased, indicating better interest coverage. Stable debt ratios (40% of assets financed by creditors) and
a consistent debt to tangible net worth ratio (creditors financing 81% of tangible assets) suggest
reasonable debt proportions. However, these ratios have limitations and should be considered alongside
earnings stability and industry benchmarks for a comprehensive assessment of the company's financial
health

PART B:
 Ratios are based on past data. The future is what is important, and uncertainties of the future cannot be
accurately determined by ratios based upon past data. Ratios provide only one aspect of a firm's long-term
debt-paying ability. Other information, such as information about management and products, is also
important. A comparison of this firm's ratios with ratios of other firms in the same industry would be
helpful in order to decide if the ratios are reasonable.

P-7-8

A TIE = EBIT B TIE = EBIT

I I

TIE = 74780000+37646000 TIE = 112426000+65135000

37646000 37646000

TIE = 112426000 TIE = 177561000

37646000 37646000
TIE = 2.98x TIE = 4.716x

PART C:

Removing equity earnings gives a more conservative times interest earned ratio. The equity income is
usually substantially more than the cash dividend received from the related investments. Therefore, the
firm cannot depend on this income to cover interest payments.

CHAPTER 8

P-8-1

2007 2006
NI/
Net Profit Margin
SALES 5.00% 4.00%
Return on Assets NI/TA 22.83% 20.00%
Total Asset Turnover Sales/TA 4.57 5.00
Return on Equity NI/TE 30.88% 25.00%
P-8-2

INCOME STATEMENT VERTICAL COMMON SIZE ANALYSIS

2007 2006 2007 2006
Sales $1,400,000 $1,200,000 100.00 100.00
Cost of goods sold 850000 730,000 Sales % %
Gross Profit $550,000 $470,000 Cost of goods sold 60.71% 60.83%
Selling expenses 205,000 240,000 Gross Profit 39.29% 39.17%
General expenses 140,000 100,000 Selling expenses 14.64% 20.00%
Income tax expense 82,000 50,000 General expenses 10.00% 8.33%
Total Exp $427,000 $390,000 Income tax expense 5.86% 4.17%
Net Income $123,000 $80,000 Total Exp 30.50% 32.50%
Net Income 8.79% 6.67%

COMMENTS:

Starr Canning has had a sharp decrease in selling expense coupled with only a modest rise in general
expenses giving an overall rise in the net profit margin.

P-8-3

ROA = NET INCOME ROE = NET INCOME

TOTAL ASSETS TOTAL EQUITY

ROA = 120000 ROE = 120000

3000000 1800000
ROA = 4% ROE = 6.60%

ROCE = NET INCOME TIE = EBIT

TOTAL COMMON EQUITY INTEREST

ROCE = 120000 TIE = 2450000

1500000 45000
ROCE = 8% TIE = 5.44x
P-8-4

Vent Plastic
Plastic Industry
Sales 101% 100.30%
Sales Return 0.983 0.3
Cogs 72.131 67.1
Selling Exp 9.398 10.1
General Exp 6.994 7.9
Other Income 0.393 0.4
Other Exp 1.53 1.3
Income Tax 4.808 5.5
Net Income 5.53 8.5

P-8-5

A Net Sales = 2007 B Net Earning = 2007

2006 2006

Net Sales = 1589150 Net Earning = 138204

1294966 137110
Net Sales = 122.71% Net Earning = 100.80%

C.

2007 2006
NPM = NI/NS 149260/1589150 149760/1294960
NPM = 9.39% 11.56%

ROA = NI/TA 149260/1437636 149760/1182110

ROA = 10.38% 12.67%

1589150/143763
TATO NS/TA 6 1294966/1182110
1.105 1.095
DUP.A = ROA= NPM*TATO ROA= NPM*TATO
DUP.A = 10.375=9.39*1.105 12.658= 11.56*1.095

OPM = EBIT/NS 275766/1589150 269506/1294966

OPM = 17.35% 20.81%
 ROOA = EBIT/OA 275766/1411686 2169506/1159666
ROOA = 19.53% 23.24%

1589150/141168
OATO = NS/OA 6 1294966/1159666
OATO = 1.125 1.116

DUP.A = ROOA= OPM*OATO ROOA= OPM*OATO

DUP.A = 19.522= 17.353*1.125 23.223= 20.81*1.116

ROE = NI/TE 149260/810292 149760/720530

ROE = 18.42% 20.78%

COMMENTS:

Profits in relation to sales, assets, and equity have all declined. Turnover has remained stable.
Overall, although absolute profits have increased in 2004, compared with 2003, the profitability
ratios show a decline.

P-8-6

2007 2006 2005

NPM = NI/NS 97501/1600000 51419/1300000 45101/1200000
NPM = 6.06% 3.96% 3.76%

ROA = NI/TA 97501/1440600 51419/1220000 45101/1180000

ROA = 6.76% 4.21% 3.82%

TATO NS/TA 1600000/1440600 1300000/1220000 1200000/1180000

1.11 1.065 1.016
DUP.A
= ROA= NPM*TATO ROA= NPM*TATO ROA=NPM*TATO
DUP.A
= 6.7266=6.06*1.110 4.212=3.96*1.065 3.818=3.76*1.016

OPM = EBIT/NS 170000/1600000 97500/1300000 87600/1200000

OPM = 10.63% 7.50% 7.30%

EBIT/
ROOA = OA 170000/1390200 97500/1160000 87600/1090000
ROOA = 12.22% 8.40% 8.03%
 OATO = NS/OA 1600000/1390200 1300000/11600000 1200000/1090000
OATO = 1.15 1.12 1.1

DUP.A ROOA=
= ROOA= OPM*OATO OPM*OATO ROOA= OPM*OATO
DUP.A
= 12.218= 10.625*1.150 8.4=7.5*1.120 8.03=7.3*1.10

ROE = NI/TE 97051/811200 51419/790100 45101/770000

ROE = 11.96% 6.51% 5.86%

COMMENTS:

All ratios computed indicate a significant improvement in profitability.

P-8-7

2007 2006 2005

NPM = NI/NS 171115/1002100 163497/980500 143990/900000
NPM = 17.07% 16.67% 15.99%

ROA = NI/TA 171115/839000 163497/770000 143900/765000

ROA = 20.39% 21.33% 18.82%

TATO NS/TA 1002100/839000 980500/770000 900000/765000

1.194 1.273 1.176
DUP.A
= ROA= NPM*TATO ROA= NPM*TATO ROA=NPM*TATO
DUP.A
= 20.381=17.07*1.194 21.22=16.67*1.273 18.80=15.99*1.176

ROE = NI/TE 171115/406000 163497/369500 143990/342000

ROE = 42.14% 44.24% 42.10%

SFA = NS/FA 1002100/302500 980500/281000 900000/93000

3.31 3.49 5.2

COMMENTS:

The ratios computed indicate a very profitable firm. Most ratios indicate A very slight reduction
in profitability in 2003. Sales to fixed assets has declined materially, but this is the only ratio for
which the trend appears to be negative.

P-8-8
 2007 2006 2005
NPM = NI/NS 12042/197580 9830/256360 9151/242150
NPM = 4.04% 3.84% 3.77%

ROA = NI/TA 12042/145760 9830/137000 9151/136000

ROA = 8.24% 7.17% 6.72%

TATO = NS/TA 297580/145760 256360/137000 242150/136000

TATO = 2.04 1.87 1.78

DUP.A = ROA= NPM*TATO ROA= NPM*TATO ROA=NPM*TATO

DUP.A = 8.24= 4.04*2.04 7.18= 3.84*1.87 6.71= 3.77*1.78

OPM = EBIT/NS 26380/297580 22860/256360 20180/242150

OPM = 8.86% 8.91% 8.33%

EBIT/
ROOA = OA 26380/135650 22860/124800 20180/122900
ROOA = 19.44% 18.31% 16.41%

OATO = NS/OA 297580/135650 256360/124800 242150/122900

OATO = 2.19 2.05 1.97

ROOA=
DUP.A = ROOA= OPM*OATO ROOA= OPM*OATO OPM*OATO
DUP.A = 19.403= 8.86*2.19 18.25= 8.19*2.05 16.41= 8.33*1.97

GPM = GP/NS 91580/297580 80060/256360 76180/242150

GPM = 30.77% 31.22% 31.45%

COMMENTS:

Net profit margin and total asset turnover both improved. This resulted in a substantial
improvement to return on assets. Operating income margin declined slightly in 2003 after a
substantial improvement in 2002. Operating asset turnover improved each year. The result of the
improvement in operating income margin and operating asset turnover was a substantial
improvement in return on operating assets. Gross profit margin declined slightly each year.
Overall profitability improved substantially over the three-year period.

CHAPTER 9:

P-9-1

DFL = EBIT
 EBT

DFL = 1000000
800000
DFL = 1.25

P-9-2

(A)

DFL = EBIT
EBT

DFL = 1025000+20000
975000

DFL = 1045000
975000
DFL = 1.071

(B)

EBIT 1100000 (10% INCREASE)

INTEREST -200000
EBT 900000
TAX 50% -450000
NET
INCOME 450000
Earnings will increase by 12.5% to $450,000 ($400,000 x 112.5% = $450,000)

(C)

(DECREAS
EBIT 800000 E)
INTERES -
T 200000
EBT 600000
-
TAX 50% 300000
NET
INCOME 300000
This is a decline in profit of 25%, with a decline in earnings before interest and tax of 20%.
P-9-3

PERCENTAGE OF EARNIN RETAINED:

2007 2006 2005

NI-ALL DIVIDEND/NI NI-ALL DIVIDEND/NI NI-ALL DIVIDEND/NI
29800000-
31200000-22610000/31200000 30600000-20410000/30600000 19270000/29800000
27.53% 33.30% 35.30%
PRICE/EARNING RATIO:

2007 2006 2005

MPS/EPS MPS/EPS MPS/EPS
12.80/1.20 14/1.20 16.30/1.27
11.42 11.666 12.834
DIVIDEND PAYOUT:

2007 2006 2005

DPS/EPS DPS/EPS DPS/EPS
0.90/1.20 0.85/1.20 0.82/1.27
80.36% 70.83% 64.456
DIVIDEND YIELD:

2007 2006 2005

DPS/MPS DPS/MPS DPS/MPS
0.90/12.80 0.85/14 0.82/16.30
7.03% 6.07% 5.03%

P-9-4

PERCENTAGE OF EARNIN RETAINED:

2007 2006 2005

NI-ALL DIVIDEND/NI NI-ALL DIVIDEND/NI NI-ALL DIVIDEND/NI
16500000-
9100000-6080000/9100000 13300000-5900000/13300000 6050000/16500000
33.19% 55.64% 63.33%

PRICE/EARNING RATIO:
 2007 2006 2005
MPS/EPS MPS/EPS MPS/EPS
41.25/2.30 35/3.4 29/4.54
17.934 10.294 6.387
DIVIDEND PAYOUT:

2007 2006 2005

DPS/EPS DPS/EPS DPS/EPS
1.90/2.30 1.90/3.40 1.90/4.54
82.60% 55.88% 41.85%

DIVIDEND YIELD:

2007 2006 2005

DPS/MPS DPS/MPS DPS/MPS
1.90/41.25 1.90/35 1.90/29
4.61% 5.43% 6.55%

BOOK VALUE PER SHARE:

2007 2006 2005

MPS/MPBV MPS/MPBV MPS/MPBV
41.25/1.205 35/1.08 29/1.05
34.23 32.4 27.61

P-9-5

YEAR 1: YEAR 2:

EPS = NI-PREFERRED DIVIDENDS EPS = NI-PREFERRED DIVIDENDS

NO. OF SHARES NO. OF SHARES OUTSTANDING
OUTSTANDING
EPS = 42000-27500
EPS = 40000-22500 380000
380000
EPS = 12500
EPS = 17500 38000
38000 EPS = 32.89
EPS = 46.05

P-9-6
July 1= 100000*6/12 = 50000 shares

The 50000 shares outstanding shares doubled when the company declares a 2:1 stock split

Oct 1 = 10000*3/12 = 2500 shares

Total outstanding shares is 52500 shares

P-9-7

Earning per Share in 2006 is $2.00

Stock Split in July 1 ($2.00/2)

Adjusted 2006 EPS $1.00

Stock Split in Dec 31 ($1.00/2)

Adjusted EPS is 0.5 in 2006

2007 = 1.5 2006 = 0.5

P-9-8

A. B.

EPS = NI-PREFERRED DIVIDENDS EPS = NI-PREFERRED DIVIDENDS

NO. OF SHARES OUTSTANDING NO. OF SHARES OUTSTANDING

EPS = 35000-3000 EPS = 30000-3000

20500 20500

EPS = 32000 EPS = 27000

20500 20500
EPS = 1.56 Per share EPS = 1.317 Per share
CHAPTER 10:

P-10-1

CASH FLOW CLASSIFICATION:

EFFECT ON CASH
INCREAS DECREAS
DATA OA IA FA E E NCT
Net Loss X X
Increase in inventory X X
Decrease in receivables X X
Increase in prepaid
insurance X X
Issuance of common stock X X
Acquisition of land
using notes payable X
Purchase of land using cash X X
Paid cash dividend X X
Payment of income taxes X X
Retirement of bonds using
cash X X
Sale of equipment for cash X X

P-10-2

CASH FLOW CLASSIFICATION:

EFFECT ON CASH
INCREAS DECREAS
DATA OA IA FA E E NCT
Net income X X
Paid cash dividend X X
Increase in receivables X X
Retirement of debt, paying
cash X X
Purchase of treasury stock X X
Purchase of equipment X X
Sale of equipment X X
Decrease in inventory X X
Acquisition of land using
common stock X
Retired bonds using
common stock X
 Decrease in accounts
payable X X
P-10-3

BBB Company Statement of Cash Flows

For the Year Ended December 31, 2007

Cash Flows from Operating Activities:

Net Income 500
Adjustments for non-cash items:
Depreciation 2800
Gain on sale of land -800
Decrease in accounts receivable 400
Decrease in inventory 500
Increase in accounts payable 800
Increase in wages payable 50
Decrease in taxes payable -1000 2750
Net Cash Provided by Operating Activities 3250
Cash Flows from Investing Activities:
Proceeds from sale of land 1800
Purchase of equipment -3500
Net Cash Used in Investing Activities -1700
Cash Flows from Financing Activities:
Dividends paid -4350
Proceeds from issuance of common stock 38000
Net Cash Used in Financing Activities -550
Net Increase in Cash flows 500
Cash & cash equivalents (beginning) 4000
Cash & cash equivalents (Ending) 4500

COMMENTS:

Net cash flow from operating activities was substantially more than the net income. Cash
dividends were greater than the net cash flow from operating activities. The cash from issuing
the common stock was sufficient to cover the net cash used for investing activities, increase the
cash and marketable securities accounts, and partially cover the large cash dividend. The fact that
a long-term source of funds (common stock) was used to cover part of the cash dividends is a
negative observation. The large cash dividend in relation to net cash flow from operating
activities would also be considered a negative situation.
P-10-4

ITEM & CHANGE EFFECT OF CHANGE

Cost of goods sold, including Dep Exp
of 15000 Use of cash of 34500
Selling & Admin Exp, including dep of 500 Use of cash of 38000
Other Exp, representing amortization of 1000 cash source as amortization of
Patent, 3000 & amortization of bond premium
premium, 1000
Increase in A/C Rec 27000 Use of Cash
Increase in A/C Pay 15000 Source of Cash
Increase in Inventories 35000 Use of Cash
Decrease in Prepaid Exp Source of Cash
Increase in Accrued Liabilities Source of Cash
Decrease in Income Taxes Pay 10000 use of Cash

DIRECT METHOD:

Cash flow from operating activities

Sales 640000
Increase in A\C Rec -27000
Cash receipt From Customer 613000
Payments to suppliers -365000
Selling and administrative expenses 34000
Income taxes paid -102000
Cash flow from operating activities 112000

INDIRECT METHOD:

Net income 143000

Add (deduct)
Depreciation 20000
Amortization of patent 3000
Amortization of bond premium -1000
Increase in accounts receivable -27000
Increase in accounts payable 15000
Increase in inventories -35000
Decrease in prepaid expenses 1000
Increase in accrued liabilities 3000
Decrease in income taxes payable -10000
 Cash flow from operating activities 112000
Add Cash
(Subtract) Basis
Accrual Basis Adjustments
19000 Increase in receivables (400) 18600
Sales

Less operating
expenses: Depreciation 2,300 Depreciation expense (2,300) -0-

Operating income 4,700 6,300

1,500 Loss on sale of (1,500) __-0-
land
Loss on sale of land

Income before tax

expense 3,200 6,300

Decrease in income
Tax expense 1,000 taxes payable 400 1,400

Net income 2200 4900

DIRECT METHOD:

Cash flow from operating activities

Sales 19000
Increase in A\C Rec -400
Cash receipt From Customer 18600
Payments to suppliers -12300
Income taxes paid -1400
Cash flow from operating activities 4900

INDIRECT METHOD:

Net income 2200

Add (deduct)
Depreciation 2300
Increase in accounts receivable -400
Increase in inventories -800
Increase in accounts payable 500
 Loss on sale of Land 1500
Decrease in income taxes payable -400
Cash flow from operating activities 4900

P-10-6:

Cash Flows from Operating Activities:

Net Income 19000
Adjustments for non-cash items:
Depreciation 10000
Increase in accounts receivable -7000
Increase in inventory -13000
Increase in A\C Pay 5000
Decrease in Accrued Liabilities -170000 -22000
Net Cash Used by Operating Activities -3000
Cash Flows from Investing Activities:
Plant Assets Increase -15000
Net Cash Used in Investing Activities -15000
Cash Flows from Financing Activities:
Mortgage Payable 11000
Common Stock Increase 6000
Dividend Paid -21000
Net Cash Used in Financing Activities -4000
Net Decrease in Cash flows -22000
Cash & cash equivalents (beginning) 60000
Cash & cash equivalents (Ending) 38000

Direct Method:

Cash Flows from Operating Activities:

Cash Flow From the customer 138000
Cash Payment to Supplier -123000
Cash Outflow for other Exp -6000
Tax Payments -12000
Net Cash Used in Investing Activities -3000

Cash Flows from Investing Activities:

Plant Assets Increase -15000

Cash Flows from Financing Activities:

 Mortgage Payable 11000
Common Stock Increase 6000
Dividend Paid -21000
Net Cash Used in Financing Activities -4000
Net Decrease in Cash flows -22000

All major segments of cash flows were negative. Net cash outflow from operating activities was
negative by $3,000, and yet dividends were paid in the amount of $21,000. Also, the company
had a negative cash flow from investing activities. These negative cash flows were partially
made up for by issuing a mortgage payable ($11,000) and common stock ($6,000).

10-7

The usual guideline for the current ratio is two to one. Arrowbell Company had a 1.14 to 1 ratio
in 2006 and a .85 to 1 ratio in 2007. The usual guideline for the acid-test ratio is one to one.
Arrowbell Company had a .68 to 1 ratio in 2006 and a .49 to 1 ratio in 2007. The cash ratio
dropped from .19 in 2006 to .12 in 2007. The working capital in 2006 was $197,958, and in 2007
it had declined to a negative $319,988. The short-term debt position appears to be very poor.

Computation of Ratios

Current Ratio = Current Assets

Current Liabilities
2005 2004

$1,755,303 = .85 $1,599,193 = 1.14

$2,075,291 $1,401,235
Cash Equivalents & Net Receivables &
Acid-Test Ratio = Marketable Securities_______________ Current Liabilities

2005

$250,480 + $760,950 = .49

$2,075,291

2004

$260,155 + $690,550 = .68

$1,401,235

Cash Ratio = Cash Equivalents & Marketable Securities

Current Liabilities
 2005 2004

$250,480 = .12 $260,155 = .19

$2,075,291 $1,401,235

Operating Cash Flow/Current Operating Cash Flow

Maturities of Long-Term Debt = Current Maturities of Long-Term
and Current Notes Payable Debt and Current Notes Payable

2005 2004

$429,491 = 46.93% $177,658 = 32.29%

$915,180 $550,155

Suppliers will be concerned that Arrowbell Company will not be able to pay its creditors and, if
payment is made, it will be later than the credit terms. The short-term creditors are financing the
expansion program.

The debt ratio has increased in 2005 to .61 from .58 in 2004. The debt/equity ratio has increased
in 2005 to 1.55 from 1.36 in 2004. (A similar increase in the debt to tangible net worth as the
increase in the debt/equity ratio.) There was an improvement in the operating cash flow/total
debt, but this ratio remains very low.

This indicates that a substantial amount of funds is coming from creditors. In general, the
dependence on creditors worsened in 2005.

Not enough information is available to compute the times interest earned, but we can
estimate this to be between 2 and 3, based on the earnings and the debt. We would like to
see the times interest earned to be higher than this amount.
The review of the Statement of Cash Flows indicates that long-term creditors are going to
be concerned by the use of debt to expand property, plant, and equipment. They also are
going to be concerned by the payment of a dividend while the working capital is in poor
condition.

2007 DR = TD/TA 2625291 2006 2176894

4316598 3776711
61.00% 58%

2007 D\ER TD/SHE 2625291 2006 2176894

 1691307 3776711
155.20% 136%

2007 DTNW = TL/SHE-IA 2625291 2006 2176894

1691307-0 3776711-0
155.20% 136.07%

2007 OCF TO TD OCF/TD 429491 2006 177658

2625291 2176894
16.36% 8.16%

A banker would be especially concerned about the short-term debt situation. This could lead to
bankruptcy, even though the firm is profitable. A banker would be particularly concerned why
management had used short-term credit to finance long-term expansion.

P-10-8

Bernett Company had a decrease in cash of $23,000, although net cash flow from operating
activities was $21,000. Net cash provided by financing activities was $116,000, while net
cash used by investing activities was $160,000. The cash flows from operations and
financing activities were not sufficient to cover the very significant net cash used by
investing activities.

b. 1. Current ratio: Current assets:

Cash $ 5,000

Accounts receivable 92,000

Inventory 130,000
Prepaid expense 4,000
Total current assets $231,000 (A)

Current liabilities:
Accounts payable $ 49,000
Income taxes payable 5,000
Accrued liabilities 6,000
Current bonds payable 10,000
Total current liabilities $ 70,000 (B)

(A) $231,000 = 3.30

 (B) $ 70,000

2. Acid-test ratio:
Cash $ 5,000
Accounts receivable 92,000
$ 97,000 (A)

Total current liabilities 70,000 (B)

(A) $97,000 = 1.39

(B) $70,000

Operating cash flow/current maturities of long-term debt and current notes payable:

Operating cash flow (from part (a)) $ 21,000 (A)

Current maturities of long-term
debt and current notes payable $ 10,000 (B)

(A) $21,000 = 2.10

(B) $10,000 4. Cash ratio:

Cash $ 5,000 (A) Total current liabilities $ 70,000 (B)

(A) $ 5,000 = 7.14%

(B) $70,000

Income before taxes $ 99,000

Plus interest expense 11,000
$110,000 (A)
$ 11,000 (B)
Interest expense

(A) $110,000 = 10 times per year

(B) $ 11,000
2.

Debt ratio: Total liabilities:

Accounts payable $ 49,000
Income taxes payable 5,000
Accrued liabilities 6,000
Bonds payable 175,000
 Total liabilities $235,000 (A)

Total assets $411,000 (B)

(A)$235,000 = 57.18%
(B)$411,000

3. Operating cash flow/total debt:

Operating cash flow (from part (a)) $ 21,000 (A)

$235,000 (B)
Total debt (from part (d.2.))

(A) $ 21,000 = 8.94%

(B) $235,000

d. 1. Return on assets:

Net income $ 69,000 (A)

Average assets
[($219,000 + $411,000) divided by 2]$315,000 (B)

(A) $ 69,000 = 21.90%

(B) $315,000

2. Return on common equity:

Net income $ 69,000 (A)

Average common equity
[($96,000 + $50,000 + $106,000 + $70,000)
divided by 2] $161,000 (B)

(A) $ 69,000 = 42.86%

(B) $161,000

e. Operating cash flow/cash dividends:

Operating cash flow (from part (a)) $ 21,000 (A)

Cash dividends $ 49,000 (B)
(A) $21,000 = .43
(B) $49,000

f. In general, the liquidity ratios look very good except for the cash ratio. The cash ratio is
approximately 7%.
g. Overall, the debt position appears to be good. Times interest earned is very good, and the
debt ratio and cash flow/total debt are good.

h. The profitability appears to be extremely good. Both the return on assets and return on
common equity are very high.

i. Operating cash flow/cash dividends indicates that operating cash flow was less than half
the cash dividends.

j. Alternatives appear to be as follows:

1. Reduce the rate of expansion or possibly stop expansion at this time. This would reduce
the need to increase receivables and inventory in the future and provide cash to pay
accounts payable.

2. Issue additional long-term debt.

3. Issue additional common stock.