Question

Red Snail Satellite Company has a total asset turnover ratio of 3.50x, net annual sales of $25 million, and operating expenses of $11.25 million (including depreciation and amortization). On its current balance sheet and income statement, respectively, it reported total debt of $1.75 million, on which it pays 7% interest on its outstanding debt.

To analyze a company’s financial leverage situation, you need to measure the firm’s debt management ratios. Based on the preceding information, what are the values for Red Snail Satellite’s debt management ratios? (Note: Do not round intermediate calculations.)

1. Debt- Ratio?

A. 24.50

B.31.85

C. 56.35

D. 19.60

2. Time - Interest Earned Ratio?

A. 112.24

B. 202.03

C. 56.12

D. 84,18

3. Red Snail Satellite Company raises around______from creditors for each dollar of equity.

A. 0,38

B. 24.50

C.0.32

D. 0.45

4. Influenced by a firm’s ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with ____imes-interest-earned ratios (TIE).

A. Low

B. High

Answer 1

1. Debt- Ratio? = Debt Amount * Asset Turnover / Sales = $1.75 M * 3.50 / 25 M = 24.50 Option A

2. Time - Interest Earned Ratio? = (sales - Operating Expenses) / (Debt * Interest Rate) = ($25 M - 11.25M) / (1.75M*7%) = 112.24 Option A

3. Red Snail Satellite Company raises around______from creditors for each dollar of equity.

Total Debt / (Total asset - Total Debt) = 1.75 M / (7.14 M - 1.75 M) = 0.32 Option C

4. Influenced by a firm’s ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with ____imes-interest-earned ratios (TIE).

B. High

answered by: anonymous