Question

From the income statement:

Depreciation expense Interest expense	$170,000 25,000
Income tax Net income	34,000 73,000

From the balance sheet:

Current liabilities	$95,000
Long-term debt	560,000
Deferred income taxes	28,000
Total Liabilities	$680,000
Preferred stock	7,000
Common stock	225,000
Premium on common stock	125,000
Retained earnings	445,000
Total Stockholders’ Equity	$802,000
Total Liabilities & Stockholders’ Equity	$1,482,000

What is the Times Interest Earned ratio?    _________ /_______ = ___________

   What is the Debt/Assets (Debt) ratio?     ________________ /___________ = __________

What is the Debt*/Equity ratio? ________________ /___________ = __________

*Use Long-term debt

Consider the additional information for the above analysis:

a. Times Interest Earned, company prior year: 3.0 Industry average: 6.1

Interpret your findings: Are the results acceptable?   Explain.

b. Debt /Equity ratio, company prior year: 0.3 Industry average: 0.5

Interpret your findings: Are the results acceptable?   Explain.

Answer 1

Times interest earned ratio = earnings before tax interest and tax / interest expense = (73000+34000+25000)/25000 = 5.3

Company's times interest earned ratio has improved compared to prior year but lower that industry average and thus the results are not acceptable.

Debt/assets ratio = total liabilities /total assets = 680000/14820000= 0.5

Debt/equity ratio = total liliabilities/(total stockholders equity - preferred stock ) =680000/(802000-7000)=0.9

The proportion of debt is very high and thus debt/equity ratio is also very. It increases credit risk and findings are not acceptable.