Question

# Exercise 13-9 Risk and capital structure analysis LO P3 [The following information applies to the questions...

Exercise 13-9 Risk and capital structure analysis LO P3

[The following information applies to the questions displayed below.]

Simon Company’s year-end balance sheets follow.

 At December 31 2017 2016 2015 Assets Cash \$ 31,883 \$ 36,172 \$ 38,810 Accounts receivable, net 89,689 64,580 50,239 Merchandise inventory 116,184 85,338 52,964 Prepaid expenses 9,965 9,495 4,187 Plant assets, net 282,074 261,135 234,400 Total assets \$ 529,795 \$ 456,720 \$ 380,600 Liabilities and Equity Accounts payable \$ 134,557 \$ 77,958 \$ 51,244 Long-term notes payable secured by mortgages on plant assets 99,601 103,995 82,430 Common stock, \$10 par value 162,500 162,500 162,500 Retained earnings 133,137 112,267 84,426 Total liabilities and equity \$ 529,795 \$ 456,720 \$ 380,600

The company’s income statements for the years ended December 31, 2017 and 2016, follow.

 For Year Ended December 31 2017 2016 Sales \$ 688,734 \$ 543,497 Cost of goods sold \$ 420,128 \$ 353,273 Other operating expenses 213,508 137,505 Interest expense 11,708 12,500 Income taxes 8,954 8,152 Total costs and expenses 654,298 511,430 Net income \$ 34,436 \$ 32,067 Earnings per share \$ 2.12 \$ 1.97

Calculate the company’s long-term risk and capital structure positions at the end of 2017 and 2016 by computing the following ratios.

(1) Debt and equity ratios.

 Debt Ratio Choose Numerator: / Choose Denominator: = Debt Ratio / = Debt ratio 2017: / = % 2016: / = % Equity Ratio Choose Numerator: / Choose Denominator: = Equity Ratio / = Equity ratio 2017: / = % 2016: / = %

(2) Debt-to-equity ratio.

 Debt-To-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-To-Equity Ratio / = Debt-to-equity ratio 2017: / = 0 to 1 2016: / = 0 to 1

(3) Times interest earned.

 Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned / = Times interest earned 2017: / = times 2016: / = times

1)2017 Debt Ratio = Total Debt/Total Assets = (134557+99601)/529795=234158//529795 = 44.20%
2016 Debt Ratio = Total Debt/Total Assets = (77958+103955)/456720= 181913/456720 = 39.83%

2017 Equity Ratio = (Total assets - Total Debt)/Total assets = (529795 - 234158)/529795 =295637/529795 = 55.80%
2016 Equity Ratio = (Total assets - Total Debt)/Total assets = (456720 - 181913)/456720 =274807/456720 =60.17%

2) 2017 Debt Equity Ratio = 234158/295637 = 79.20%
2016 Debt Equity Ratio = 181913/274807 = 66.20%

3) Time Interest earned 2017 = EBIT/ Interest = (Sales - COGS - Operating expenses)/Interest =(688734-420128-213508)/11708 =55098/11708 = 4.71

Time Interest earned 2016 = EBIT/ Interest = (Sales - COGS - Operating expenses)/Interest =(543497-353273-137505)/12500 = 52719/12500 = 4.22

Please Discuss in case of Doubt

Best of Luck. God Bless

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