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