Red Snail Satellite Company has a total asset turnover ratio of 8.50x, net annua

Question

Red Snail Satellite Company has a total asset turnover ratio of 8.50x, net annual sales of $40 million, and operating expenses of s18 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $2.50 million on which it pays a 11% interest rate. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Red Snail Satellite's debt management ratios Ratio Value Debt ratio Times-interest-eamed ratio Red Snail Satellite Company raises around from creditors for each dollar of equity. Infiuenced by a firm's abilty to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with debt ratios 3 34 2004-206 Al itsee 2013 Cengage Leaming tobgi Continue without saving 13 MacBook Ai esc F3 2 4

Explanation / Answer

Total Asset Turnover Ratio = 8.50
Annual Sales = $40,000,000
Operating Expenses = $18,000,000
Total Debt = $2,500,000
Interest Rate = 11%

Interest Expense = Total Debt * Interest Rate
Interest Expense = $2,500,000 * 11%
Interest Expense = $275,000

Operating Income = Annual Sales - Operating Expenses
Operating Income = $40,000,000 - $18,000,000
Operating Income = $22,000,000

Total Asset Turnover Ratio = Annual Sales / Total Assets
8.50 = $40,000,000 / Total Assets
Total Assets = $4,705,882

Total Equity = Total Assets - Total Debt
Total Equity = $4,705,882 - $2,500,000
Total Equity = $2,205,882

Debt Ratio = Total Debt / Total Assets
Debt Ratio = $2,500,000 / $4,705,882
Debt Ratio = 53.13%

Times-interest-earned Ratio = Operating Income / Interest Expense
Times-interest-earned Ratio = $22,000,000 / $275,000
Times-interest-earned Ratio = 80x

Debt-equity Ratio = Total Debt / Total Equity
Debt-equity Ratio = $2,500,000 / $2,205,882
Debt-equity Ratio = 1.13

Red Snail Satellite Company raises around 1.13 from creditors for each dollar of equity.

Influenced by a firm’s ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with low debt ratios.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

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