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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
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Homework Answers

Answer #1

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


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