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QUESTION FOUR Consider the following statements of financial position for Electric Avenue LTD, a manufacturer of electronic appliances. Electric Avenue LTD Statement of income for the period ended 31 January 2014: 2013 2014 R R 825000 930 000 585 750 Sales(50% on credit) Less Cost of sales 632 400 239 250 297 600 Gross profit 11 250 22 800 Add: Income from other financial assets 750 4 800 Interest received 10 500 18 000 Dividend received 250 500 320 400 202 200 158 520 Less operating expenses 42 750 24 450 Sales expenditure General and admin. expenses 122 250 101 820 32 250 37 200 161 880 48 300 Depreciation Earnings before interest and taxation(EBIT) 22 500 18 000 Less interest paid Net earnings before taxation 139 380 30 300 37 080 13 500 Less income tax 102 300 16 800 Earnings after income tax Less Preference dividend 10 800 10 800 91 500 6 000 Distributable Earnings Electric Avenue LTD Balance sheet as at 1 January 2014 2013 2014 R R ASSETS 210 000 Non-current assets 210 000 498 000 498 000 75 000 60 000 Property, plant and equipment Intangible assets 60 000 75 000 Listed shares 487 500 417 000 Current assets 120 000 240 000 Inventory 102 600 153 000 Trade and other receivables 36 300 24 000 Cash and cash equivalents 1 114 500 990 000 Total assets 567 000 498 000 Equity and Liabilities Capital and reserves Ordinary share capital Preference share capital 300 000 300 000 90 000 90 000 30 000 30 000 Share premium Distributable reserves-retained earnings 147 000 78 000 150 000 120 000 Non-current liabilities Interest-bearing borrowings 150 000 120 000 15% debenture 273 000 496 500 Current liabilities 261 750 322 500 Trade and other payables 11 250 9 000 Shareholders for dividends 165 000 Bank overdraft DISTANCE 1 114 500 990 000 Total equity and liabilities REQUIRED: 4.1 Calculate and comment on the following liquidity ratios for 2014 and 2013: (2) 4.1.1 Current ratio (2) 4.1.2 Acid test ratio 4.2 Calculate the following activity ratios for 2014: (2) 4.2.1 Inventory turnover rate (2) 4.2.2 Stock holding ratio (2) 4.2.3 Debtor collection period (3) 4.2.4 Fixed asset turnover ratio 4.3 Comment on the effectiveness with which the assets of Electric Avenue are (5) used to realise sales 4.4 Calculate the following gearing and solvency ratios for 2014: (2) 4.4.1 Debt ratio (2) 4.4.2 Interest coverage ratio (3) 4.4.3 Debt Equity ratio 4.5 Asses the degree to what the operations of Electric Avenue are funded by debt financing versus equity capital