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Ratios, Investment in bonds

1.Using the Data in the Balance Sheet Attached, calculate the following:

Balance Sheet
ABC CORPORATION
June 30, 1988

Assets Liabilities
Cash $165,000 Accounts payable $166,000
Marketable securities 18,000 Accrued taxes 70,000
Accounts receivable 260,000 Notes payable 84,000
Inventory 455,000 Accrues Expenses 151,000

Total Current Assets $898,000 Total current Liabilities $471,000

First mortgage bonds: 500,000
7 1/2% ----due 1/1/94
Total Liabilities $971,000

Property, plant and equipment: Stockholders' Equity
Land $ 75,000
Buildings 506,000
Equipment 89,000 Preferred stock 100,000
Machinery 164,000 ($100 par)
834,000 1,000 shares authorized,
issued , and outstanding

Less: Accumulated -217,000 Common Stock ($25 par) 300,000
Depreciation 12,000 shares authorized,
issued and outstanding
Net property, plant & $ 617,000
Equipment Paid-in capital 58,000
Intangibles 204,000 Accumulated retained 290,000
earnings

Total Assets $1,719,000 Total stockholders' $ 748,000
_________ equity
Total liabilities and
Stockholders' equity $ 1,719,000
__________

a- ABC's capitalization or capital structure
b- ABC's working capital
c- ABC's current ratio
d- ABC's Acid-test ratio

2. Assuming that the following is the Income Statement for ABC Corporation is :
Income Statement
ABC Corporation
June 87 - June 88

Net Sales $60,000
Cost of goods sold $10,000
General Operating Expenses $30,000 $40,000

Operating Income $20,000
Interest expenses $4,000
Pretax Income $16,000
Taxes $6,000
Net Income after tax $10,000
Preferred Dividend $1,000

Earning Available to Common $9,000

a- What is ABC's EPS?
b- What is ABC's return on equity?
c- What is ABC's preferred dividend rate?
d- What is ABC's book value per share?

3. If you are in a 28% tax bracket, which of the following two investments you pick
a- A $10,000 Municipal Bond with 7% coupon rate, or
b- A $10,000 Corporate Bond with 8.5% coupon rate?

4. What is the tax-free yield equivalent of a taxable 9.2% corporate bond for an individual in a 25% tax bracket?

Attachments

Solution Preview

1.Using the Data in the Balance Sheet Attached, figure out the following:

a- ABC's capitalization or capital structure

Long-term debt ratio =Long-term debt/ (Long-term debt + Total Equity)

Long term debt= $500,000
Total Equity= $748,000
$1,248,000

Long-term debt ratio =Long-term debt/ (Long-term debt + Total Equity)= 0.40 =500000 / 1248000

b- ABC's working capital

Current Assets= $898,000
Current Liabilities= $471,000
Working Capital = Current Assets- Current Liabilities= $427,000 =898000 - 471000

c- ABC's current ratio

Current ratio = Current Assets ÷ Current Liabilities= 1.91 =898000 ÷ 471000

d- ABC's Acid-test ratio

Acid-test ratio = (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities
Or Acid-test ratio = (Current Assets - Inventory) ÷ Total current liabilities

Current Assets= $898,000 ...

Solution Summary

Calculates capital structure, working capital, current ratio, acid-test ratio, EPS, return on equity, preferred dividend rate, book value per share, tax-free yield equivalent.

$2.19