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 700,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of the year was $28. 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	$	1,170		$	1,410
Accounts receivable, net		9,600			8,100
Inventory		13,800			11,000
Prepaid expenses		700			670
Total current assets		25,270			21,180
Property and equipment:
Land		10,100			10,100
Buildings and equipment, net		46,879			41,257
Total property and equipment		56,979			51,357
Total assets	$	82,249		$	72,537
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,600		$	18,900
Accrued liabilities		1,050			800
Notes payable, short term		0			140
Total current liabilities		19,650			19,840
Long-term liabilities:
Bonds payable		9,300			9,300
Total liabilities		28,950			29,140
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		47,299			37,397
Total stockholders' equity		53,299			43,397
Total liabilities and stockholders' equity	$	82,249		$	72,537

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	70,000		$	66,000
Cost of goods sold		34,000			36,000
Gross margin		36,000			30,000
Selling and administrative expenses:
Selling expenses		10,900			10,700
Administrative expenses		7,200			6,400
Total selling and administrative expenses		18,100			17,100
Net operating income		17,900			12,900
Interest expense		930			930
Net income before taxes		16,970			11,970
Income taxes		6,788			4,788
Net income		10,182			7,182
Dividends to common stockholders		280			525
Net income added to retained earnings		9,902			6,657
Beginning retained earnings		37,397			30,740
Ending retained earnings	$	47,299		$	37,397

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

Answer 1

Ans:

1	Times Interest Earned Ratio	19.25
2	Debt to Equity Ratio	0.54
3	Equity multiplier	1.54

(1) Times Interest earned ratio :-

Earnings before interest expense and income taxes / Interest Expense

$17900/$930 = 19.25

(2) Debt to Equity Ratio :-

Total Liabilities/Stockholders Equity

$28950/$53299 = 0.54

(3) Equity multiplier :-

total assets/stockholders equity

$82249/$53299 = 1.54

Hope this helped ! Let me know in case of any queries.

answered by: anonymous