Question

Exercise 13-4 Financial Ratios for Debt Management [LO13-4]

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 500,000 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 $23. 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	$	1,110		$	1,330
Accounts receivable, net		9,200			7,300
Inventory		12,100			11,000
Prepaid expenses		790			640
Total current assets		23,200			20,270
Property and equipment:
Land		9,100			9,100
Buildings and equipment, net		53,013			43,869
Total property and equipment		62,113			52,969
Total assets	$	85,313		$	73,239
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,800		$	18,100
Accrued liabilities		920			810
Notes payable, short term		0			200
Total current liabilities		19,720			19,110
Long-term liabilities:
Bonds payable		9,600			9,600
Total liabilities		29,320			28,710
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		49,993			38,529
Total stockholders' equity		55,993			44,529
Total liabilities and stockholders' equity	$	85,313		$	73,239

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	75,000		$	65,000
Cost of goods sold		37,000			34,000
Gross margin		38,000			31,000
Selling and administrative expenses:
Selling expenses		10,600			10,500
Administrative expenses		7,000			6,600
Total selling and administrative expenses		17,600			17,100
Net operating income		20,400			13,900
Interest expense		960			960
Net income before taxes		19,440			12,940
Income taxes		7,776			5,176
Net income		11,664			7,764
Dividends to common stockholders		200			375
Net income added to retained earnings		11,464			7,389
Beginning retained earnings		38,529			31,140
Ending retained earnings	$	49,993		$	38,529

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

Solution:

1)	Times Interest Earned Ratio	This Year
	Earnings Before Interest and Taxes (i.e. Net Operating Income)	$20,400
	Interest Expense	$960
	Times Interest Earned Ratio (Earnings Before Interest and Taxes / Interest Expense)	21.25
		Times
2)	Debt to Equity Ratio
	Total Debt (Total Liabilities)	$29,320
	Stockholder's Equity	$55,993
	Debt to Equity Ratio (Total Debt / Total Stockholde's Equity)	0.52
		Times
3)	Equity Multiplier	This Year
	Total Assets	$85,313,000
	Dividend by Number of Shares	500,000 Shares
	Equity Multiplier	170.626

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