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 $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	$	1,190		$	1,410
Accounts receivable, net		9,800			7,200
Inventory		12,600			12,600
Prepaid expenses		740			610
Total current assets		24,330			21,820
Property and equipment:
Land		10,400			10,400
Buildings and equipment, net		44,614			38,102
Total property and equipment		55,014			48,502
Total assets	$	79,344		$	70,322
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	20,200		$	19,400
Accrued liabilities		1,020			890
Notes payable, short term		0			230
Total current liabilities		21,220			20,520
Long-term liabilities:
Bonds payable		9,300			9,300
Total liabilities		30,520			29,820
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		42,824			34,502
Total stockholders' equity		48,824			40,502
Total liabilities and stockholders' equity	$	79,344		$	70,322

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	74,000		$	66,000
Cost of goods sold		41,000			42,000
Gross margin		33,000			24,000
Selling and administrative expenses:
Selling expenses		11,100			10,300
Administrative expenses		6,700			6,100
Total selling and administrative expenses		17,800			16,400
Net operating income		15,200			7,600
Interest expense		930			930
Net income before taxes		14,270			6,670
Income taxes		5,708			2,668
Net income		8,562			4,002
Dividends to common stockholders		240			240
Net income added to retained earnings		8,322			3,762
Beginning retained earnings		34,502			30,740
Ending retained earnings	$	42,824		$	34,502

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

Answer to Part 1.

Times Interest Earned Ratio = Earning before Interest and Taxes / Interest Expense
Times Interest Earned Ratio = 15,200 / 930
Times Interest Earned Ratio = 16.3 times

Answer to Part 2.

Debt to Equity Ratio = Total Debt / Total Stockholders’ Equity
Debt to Equity Ratio = 30,520 / 48,824
Debt to Equity Ratio = 0.63 times

Answer to Part 3.

Equity Multiplier = Average Total Assets / Average Stockholders’ Equity
Average Total Assets = (79,344 + 70,322) / 2
Average Total Assets = $74,833

Average Stockholders’ Equity = (48,824 + 40,502) / 2
Average Stockholders’ Equity = $44,663

Equity Multiplier = 74,833 / 44,663
Equity Multiplier = 1.68 times