Two online travel companies, E-Travel and Pricecheck, provide the following sele

Question

Two online travel companies, E-Travel and Pricecheck, provide the following selected financial data (S in thousands) E-Travel Pricecheck 4,587,156$1,600,224 Total assets Total liabilities Total stockholders' 2,354,475 467,610 1,132,614 2,505.42651,888,212 2,232,681 equity Sales revenue Interest expense Tax expense Net income 15,084 38,168 281,526 471,472 75,233 136,400 Required 1-a. Calculate the debt to equity ratio for E-Travel and Pricecheck. (Enter dollar answers in thousands of dollars and round ratios to 2 decimal places.) ebt to Equity Ratio E-Travel Debt to Equity Ratio Pricecheck 1-b. Which company has the higher ratio? E-Travel Pricecheck 2-a. Calculate the times interest earned ratio for E-Travel and Pricecheck. (Enter dollar answers in thousands of dollars and round ratios to 1 decimal place.) Times Interest Earned Ratio E-Travel imes Interest Earned Ratio Pricecheck become due? 2-b. Which company is better able to meet interest payments as they E-Travel Pricecheck

Explanation / Answer

1a. Calculation of debt to equity ratio for E-Travel and Pricecheck:

Debt to equity ratio = Total liabilities/stockholders’ Equity

Total Liabilities

Stockholders' Equity

Debt/Equity Ratio

E-Travel

$2,354,475

$2,232,681

1.05

Pricecheck

$467,610

$1,132,614

0.41

E-Travel = 2,354,475/2,232,681 = 1.05

Pricecheck = 467,610/1,132,614 = 0.41

1b. The company with higher ratio is –

E-Travel has higher debt to equity ratio at 1.05, while Pricecheck has lower ratio at 0.41.

The higher ratio indicates that E-Travel relies heavily on debt financing.

2a. Calculation of times interest earned ratio for E-Travel and Pricecheck:

Times interest earned ratio = Earnings Before Interest and taxes/interest expense

EBIT

Interest

Times Interest Earned Ratio

E-Travel

$493,159

$75,233

6.56

Pricecheck

$524,724

$15,084

34.79

Computations –

Earnings before interest and taxes, EBIT = net income + interest expense + tax expense

EBIT For E-Travel = $281,526 + $75,233 + $136,400 = $493,159

EBIT for Pricecheck = $471,472 + $15,084 + $38,168 = $524,724

Times interest earned ratio for E-Travel = $493,159/$75,233 = 6.56

Times interest earned ratio for Pricecheck = $524,724/$15,084 = 34.79

2b. The company that is better able to meet interest payments as they become due is,

Pricecheck

Explanation: The times interest earned ratio of Pricecheck – 34.79 is much higher than E-Travel – 6.56.

Hence, Pricecheck is in a better position to pay its interest obligations, as the higher times to interest ratio is a good indicator of a company’s ability to service debt.

Total Liabilities

Stockholders' Equity

Debt/Equity Ratio

E-Travel

$2,354,475

$2,232,681

1.05

Pricecheck

$467,610

$1,132,614

0.41

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.