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# Debt to total assets

Problem #5

Condensed balance sheet and income statement data for Harold Legal Corporation appears below:

Harold Legal CORPORATION
Balance Sheet
December 31
2007 2006 2005
Cash \$25,000.00 \$20,000.00 \$18,000.00
Receivables (net) 50,000 45,000 48,000
Other current assets 90,000 95,000 64,000
Investments 75,000 70,000 45,000
Plant and equipment (net) 400,000 370,000 358,000
\$640,000 \$600,000 \$533,000
Current liabilities \$75,000 \$80,000 \$70,000
Long-term debt 80,000 85,000 50,000
Common stock, \$10 par 340,000 310,000 300,000
Retained Earnings 145,000 125,000 113,000
\$640,000 \$600,000 \$533,000

Harold Legal CORPORATION
Income Statement
For the Year Ended December 31
2007 2006
Sales \$740,000 \$700,000
Less: Sales returns and allowances 40,000 50,000
Net sales 700,000 650,000
Cost of goods sold 420,000 400,000
Gross profit 280,000 250,000
Operating expenses (including income taxes) 232,000 218,000
Net income \$48,000 \$32,000

1. The market price of Legal's common stock was: \$4.00 for 2005
\$5.00 for 2006
\$8.00 for 2007
2. All dividends were paid in cash.

Instructions:
(a)(1) Compute the profit margin for 2006 and 2007.

"2006
Profit margin" Title = Amount = Formula
Title Amount

"2007
Profit margin" Title = Amount = Formula
Title Amount

(a)(2) Compute the asset turnover for 2006 and 2007.

"2006
Asset turnover" Title = Amount = Formula time
Title Amount

"2007
Asset turnover" Title = Amount = Formula time
Title Amount

(a)(3) Compute the earnings per share for 2006 and 2007. (Weighted average common shares in 2007 were 32,000 and in 2006
were 31,000

"2006
Earnings per share" Title = Amount = Formula per share
Title Amount

"2007
Earnings per share" Title = Amount = Formula per share
Title Amount

(a)(4) Compute the price-earnings ratio for 2006 and 2007.

"2006
Price-earnings ratio" Title = Amount = Formula times
Title Amount

"2007
Price-earnings ratio" Title = Amount = Formula times
Title Amount

(a)(5) Compute the payout ratio for 2006 and 2007.

"2006
Payout ratio" Title = Amount = Formula
Title Amount

"2007
Payout ratio" Title = Amount = Formula
Title Amount

(a)(6) Compute the debt to total assets for 2006 and 2007.

"2006
Debt to total assets" Title Amount = Formula
Title Amount

"2007
Debt to total assets" Title Amount = Formula
Title Amount

(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial position and operating results from 2006 to 2007 of Harold Legal Corporation.

#### Solution Preview

Harold Legal CORPORATION
Balance Sheet
December 31
2007 2006 2005
Cash \$25,000.00 \$20,000.00 \$18,000.00
Receivables (net) 50,000 45,000 48,000
Other current assets 90,000 95,000 64,000
Investments 75,000 70,000 45,000
Plant and equipment (net) 400,000 370,000 358,000
\$640,000 \$600,000 \$533,000
Current liabilities \$75,000 \$80,000 \$70,000
Long-term debt 80,000 85,000 50,000
Common stock, \$10 par 340,000 310,000 300,000
Retained Earnings 145,000 125,000 113,000
\$640,000 \$600,000 \$533,000

Harold Legal CORPORATION
Income Statement
For the Year Ended December 31
2007 2006
Sales \$740,000 \$700,000
Less: Sales returns and allowances 40,000 50,000
Net sales 700,000 650,000
Cost of goods sold 420,000 400,000
Gross profit 280,000 250,000
Operating expenses (including income taxes) 232,000 218,000
Net income ...

#### Solution Summary

This provides the steps to compute debt to total assets ratios and other ratios

\$2.19