Question

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 600,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the year was $26. All of the company’s sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	1,190		$	1,360
Accounts receivable, net		10,400			7,500
Inventory		12,300			11,200
Prepaid expenses		800			660
Total current assets		24,690			20,720
Property and equipment:
Land		10,400			10,400
Buildings and equipment, net		46,128			42,574
Total property and equipment		56,528			52,974
Total assets	$	81,218		$	73,694
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	19,000		$	18,900
Accrued liabilities		1,050			750
Notes payable, short term		0			220
Total current liabilities		20,050			19,870
Long-term liabilities:
Bonds payable		9,600			9,600
Total liabilities		29,650			29,470
Stockholders' equity:
Common stock		2,000			2,000
Additional paid-in capital		4,000			4,000
Total paid-in capital		6,000			6,000
Retained earnings		45,568			38,224
Total stockholders' equity		51,568			44,224
Total liabilities and stockholders' equity	$	81,218		$	73,694

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	68,000		$	65,000
Cost of goods sold		36,000			34,000
Gross margin		32,000			31,000
Selling and administrative expenses:
Selling expenses		11,000			10,100
Administrative expenses		7,400			6,300
Total selling and administrative expenses		18,400			16,400
Net operating income		13,600			14,600
Interest expense		960			960
Net income before taxes		12,640			13,640
Income taxes		5,056			5,456
Net income		7,584			8,184
Dividends to common stockholders		240			600
Net income added to retained earnings		7,344			7,584
Beginning retained earnings		38,224			30,640
Ending retained earnings	$	45,568		$	38,224

Required:

Compute the following financial ratios for this year:

1.	Times interest earned ratio. (Round your answer to 1 decimal place.)

      

2.	Debt-to-equity ratio. (Round your answer to 2 decimal places.)

      

3.	Equity multiplier. (Round your answer to 2 decimal places.)

      

Answer 1

1.Times interest earned ratio = earnings before interest expense and income taxes / interest expense

=>$13,600 / 960.

=>14.2 times (rounded to two decimals).

2.Debt to equity ratio

=>total liabilities / stock holder's equity.

=>29,650 / 51,568.

=>0.57...(rounded to 2 decimals).

3.equity multiplier = average total assets / average stockholder's equity

here,

average total assets = (81,218 + 73,694) / 2 =>77,456.

average stockholders equity = (51,568 + 44,224) / 2

=>47,896.

equity multiplier = 77,456 / 47,896

=>1.62