Question

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear...

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.)


      

Homework Answers

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

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