Solutions to Chapter 4
Measuring Corporate Performance
7,018
1. a. Long-term debt ratio = = 0.42
7,018 + 9,724
4,794 + 7,018 + 6,178
b. Total debt ratio = = 0.65
27,714
2,566
c. Times interest earned = = 3.75
685
2,566 + 2,518
d. Cash coverage ratio = = 7.42
685
3,525
e. Current ratio = = 0.74
4,794
89 + 2,382
f. Quick ratio = = 0.52
4,794
1,311 + 685
g. Operating profit margin = = 0.151 = 15.1%
13,193
4,060
h. Inventory turnover = = 19.11
(187 + 238) / 2
(187 + 238) / 2
i. Days sales in inventory = = 19.10 days
4,060 / 365
(2,382 + 2,490) / 2
j. Average collection period = = 67.39 days
13,193 / 365
1,311
k. Return on equity = = 0.139 = 13.9%
(9,724 + 9,121) / 2
4-1
1,311 + 685
l. Return on assets = = 0.072 = 7.2%
(27,714 + 27,503) / 2
856
m. Payout ratio = = 0.65
1,311
4. a. EVA = net income – (cost of equity x equity)
= 5,642 – (.10 x 14,251) = $4,217
EVA fell since the cost of equity is higher.
b. Accounting profits are unaffected by changes in the cost of equity.
c. Economic Value Added is a better measure of company
performance because accounting profits do not include all costs;
specifically, the cost of equity capital.
4-2
