The Smathers Company has a long-term debt ratio (i. e., the ratio of long-term debt to long-term debt plus equity) of .46 and a current ratio of 1.35. Current liabilities are $2,435, sales are $10,585, profit margin is 11 percent, and ROE is 16 percent. Required:
What is the amount of the firm’s net fixed assets?

$12,624

Explanation:

The parameters given in the question above are

Current ratio=1.35

Current liability= $2,435

Sales= $10,585

Profit margin= 11%

ROE= 16%

First of all we have to find the current assets since we are given the current ratio and current liability

Current ratio= Current assets/Current liability

1.35=Current assets/2,435

Current assets= 1.35×2,435

Current assets = $3287.25

The next step is to calculate the net income

Net income= sales×profit margin

= $10,585×11/100

= $10,585×0.11

= $1164.35

The next step is to calculate the equity

ROE= Net income/Equity

16/100= $1164.35/Equity

0.16= $1164.35/Equity

Equity= $1164.35/0.16

Equity= $7277.18

The next step is to find the long term debt

long-term debt/(long-term debt+equity)= long term debt ratio

Let us use L to represent the long term debt

L/(L+7277.18)=0.46

Cross multiply both sides

L= 0.46(L+7277.18)

L= 0.46L + 3347.50

Collect the like terms

L-0.46L=3347.50

0.54L= 3347.50

L= 3347.50/0.54

L= 6199.07

Long term debt = $6199.07

The final step is to calculate the fixed assets

(Current assets+fixed assets)=(Current debt+Long term debt)+equity

($3287.25+fixed assets)=($2,435+$6199.07)+$7277.18

($3287.25+fixed assets)= $8634.07+$7277.18

($3287.25+fixed assets)=$15911.25

Fixed assets= $15911.25-$3287.25

Fixed assets= $12,624

Hence the amount of fixed assets in Smathers company is $12,624