Question

Here are simplified financial statements for Phone Corporation in a recent year: INCOME STATEMENT (Figures in $ millions) Net sales $ 13,193 Cost of goods sold 4,060 Other expenses 4,049 Depreciation 2,518 Earnings before interest and taxes (EBIT) $ 2,566 Interest expense 685 Income before tax $ 1,881 Taxes (at 35%) 658 Net income $ 1,223 Dividends $ 856

Answer 1

Answer:

To calculate the following financial ratios for Phone Corporation using 365 days in a year,

a. Return on capital =  10.20%

b. Total debt ratio = 0.65

c. Times interest earned = 3.75

d. Cash coverage ratio = 7.42

Explanation:

a) For return on capital

Return on Capital = NI + Interest x (1-tax) average capital

= [1223 + (1 - 35%) x 685] / [(7018 + 6833 + 9724 + 9121) / 2]

= 10.20%

b) For Total debt

Total debt / Total asset

= (4794 + 7018 + 6178) / 27714

= 0.65

c) Times interest earned

EBIT / interest expense

= 2566 / 685

= 3.75

d) Cash Coverage ratio

(EBIT + Depreciation) / Interest Expense

= (2566 + 2518) / 685

= 7.42