Exercise - Financial Ratios for Debt Management
Comparative financial statements for Weller Corporation, a merchandising company, for the fiscal year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 800,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, 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 $18. All of the company's sales are on account.
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Weller Corporation Comparative Balance Sheet (dollars in thousands)
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This Year
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Last Year
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Assets
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Current assets:
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Cash
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$1,280
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$1,560
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Accounts receivable, net
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12,300
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9,100
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Inventory
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9,700
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8,200
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Prepaid expenses
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1,800
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2,100
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Total current assets
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25,080
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20,960
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Property and equipment:
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Land
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6,000
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6,000
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Buildings and equipment, net
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19,200
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19,000
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Total property and equipment
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25,200
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25,000
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Total assets
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$50,280
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$45,960
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Liabilities and Stockholders' Equity
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Current liabilities:
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Accounts payable
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$9,500
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$8,300
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Accrued liabilities
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600
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700
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Notes payable, short term
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300
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300
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Total current liabilities
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10,400
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9,300
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Long-term liabilities:
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Bonds payable
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5,000
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5,000
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Total liabilities
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15,400
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14,300
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Stockholders' equity:
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Common stock
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800
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800
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Additional paid-in capital
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4,200
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4,200
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Total paid-in capital
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5,000
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5,000
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Retained earnings
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29,880
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26,660
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Total stockholders' equity
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34,880
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31,660
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Total liabilities and stockholders' equity
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$50,280
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$45,960
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Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
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This Year
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Last Year
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Sales
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$79,000
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$74,000
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Cost of goods sold
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52,000
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48,000
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Gross margin
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27,000
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26,000
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Selling and administrative expenses:
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Selling expenses
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8,500
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8,000
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Administrative expenses
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12,000
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11,000
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Total selling and administrative expenses
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20,500
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19,000
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Net operating income
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6,500
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7,000
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Interest expense
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600
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600
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Net income before taxes
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5,900
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6,400
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Income taxes
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2,360
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2,560
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Net income
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3,540
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3,840
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Dividends to common stockholders
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320
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600
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Net income added to retained earnings
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3,220
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3,240
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Beginning retained earnings
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26,660
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23,420
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Ending retained earnings
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$29,880
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$26,660
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Required: Compute the following financial ratios for this year:
1. Times interest earned ratio. (Round your answer to 1 decimal place. )
2. Debt-to-equity ratio. (Round your answer to 2 decimal places.)
3. Equity multiplier. (Round your answer to 2 decimal places.)