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Problem Solution 1-8

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a. Acid-test ratio: (Cash + Accounts receivable) ÷ Total Current Liabilities = ($325+$3599) ÷ $3945 =0.99 Interpretation: The acid-test ratio assumes that all current liabilities are pay able immediately and that the debtor will convert the mast liquid assets to cash, the most liquid assets can cover current liabilities.

b. Return on Assets: [Net income + Interest expense*(1-Tax rate)] ÷ Average total assets =[$1265+$78(1 - .40)] ÷ [($4,792 $8,058) ÷ 2] = 20.4% Interpretation: This ratio measures the return for each dollar invested in assets. Once you make the calculation of dividing EBIT by net operating assets, you come up with a percentage figure that can be used to see exactly how much the company earns for each dollar invested in it.

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: ROE measures the rate of return on the ownership interest f the common stock owners, return on each dollar invested by equity holders.

d. Earnings per share: (Net income - Preferred dividends) ÷ Average common shares outstanding =($1265-$45) ÷ [(550+829) ÷2] =$1.77
Interpretation: Earnings per share measures the net income earned per each share owned.

e. Gross profit margin ratio: Net sales – Cost of goods sold) ÷ Net sales =($12065-$8048) ÷ 12065 =33.3%
Interpretation: Net sales in the gross profit for each part.

f. Times interest earned: (Net income before tax + interest expense) ÷ interest expense =($2259+$78) ÷ $78 =29.96 times
Interpretation: TIE or interest coverage ratio is a measure of a company’s ability to honor its debt payments. Net income before tax

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