Exercise 13-4 Financial Ratios for Debt Management [LO13-4] Comparative financia

Question

Exercise 13-4 Financial Ratios for Debt Management [LO13-4]

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 600,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the year was $23. All of the company’s sales are on account.

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 600,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the year was $23. All of the company’s sales are on account.

Explanation / Answer

Solution 1:

Times interest earned ratio = Net Operating income / Interest expense = $10,200 / 960 = 10.6 times

Solution 2:

Debt to equity ratio = Total liabilites / Total stockholder's Equity = $29,290 / $49,918 = 0.59

Solution 3:

Equity multiplier = Total Assets / Total stockholder's equity

= $79,208 / $49,918 = 1.59 times

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