Question: 1. ABC Tire Company has grown a lot and has noticed that they are starting to take on a lot of debt in opening new retail installation locations. You are brought in as a consultant to analyze their financial situation. Look through the four types of financial ratios (liquidity, leverage, profitability, and market measure ratios). Briefly describe each type of ratio. Then figure out which type of financial ratios you would use to look at ABC Tires debt issues.
Question 2. Selected information from the comparative financial statements of ABCTire Company for the year ended December 31, appears below:
2014
2013
Accounts receivable (net)
$ 180,000
$200,000
Inventory
140,000
160,000
Total assets
1,200,000
800,000
Current liabilities
140,000
110,000
Long-term debt
400,000
300,000
Net credit sales
1,330,000
700,000
Cost of goods sold
900,000
530,000
Interest expense
50,000
25,000
Income tax expense
60,000
29,000
Net income
150,000
85,000
There is no preferred stock and the tax rate is 30%.
Required:
Calculate each of the following for 2014:
a. Debt ratio
b. Debt-to-equity ratio
c. Times interest earned ratio
d. Gross margin percentage
e. Return on assets
f. Return on common stockholders' equity