Question

  
Simon Company’s year-end balance sheets follow.
  

At December 31	Current Yr			1 Yr Ago			2 Yrs Ago
Assets
Cash	$	31,800		$	35,625		$	37,800
Accounts receivable, net		89,500			62,500			50,200
Merchandise inventory		112,500			82,500			54,000
Prepaid expenses		10,700			9,375			5,000
Plant assets, net		278,500			255,000			230,500
Total assets	$	523,000		$	445,000		$	377,500
Liabilities and Equity
Accounts payable	$	129,900		$	75,250		$	51,250
Long-term notes payable secured by mortgages on plant assets		98,500			101,500			83,500
Common stock, $10 par value		163,500			163,500			163,500
Retained earnings		131,100			104,750			79,250
Total liabilities and equity	$	523,000		$	445,000		$	377,500

  
The company’s income statements for the current year and 1 year ago, follow.

For Year Ended December 31	Current Yr						1 Yr Ago
Sales				$	673,500					$	532,000
Cost of goods sold	$	411,225					$	345,500
Other operating expenses		209,550						134,980
Interest expense		12,100						13,300
Income tax expense		9,525						8,845
Total costs and expenses					642,400						502,625
Net income				$	31,100					$	29,375
Earnings per share				$	1.90					$	1.80

For both the Current Year and 1 Year Ago, compute the following ratios:

(3-a) Times interest earned.
(3-b) Based on times interest earned, is the company more or less risky for creditors in the Current Year versus 1 Year Ago?

Complete this question by entering your answers in the tabs below.

• Required 3A
• Required 3B

Times interest earned.

	Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned / = Times interest earned Current Year: / = 0 times 1 Year Ago: / = 0 times

• Required 3A
• Required 3B

Based on times interest earned, is the company more or less risky for creditors in the Current Year versus 1 Year Ago?

	Times interest earned

Answer 1

3-a) Times Interest Earned Choose Numerator: Choose Denominator: Earnings Before Interest and Taxe I Interest Expense Current Yr $52,725 $12,100 1 Yr Ago $51,520 $13,300 Times Interest Earned Times Interest Earned 4.36 times ($52725 / $12100] 3.87 times ($51520 / $13300] Workings: Current Yr1 Yr Ago $673,500 $532,000 Sales Less: Cost of goods sold Other operating expenses Earnings Before Interest and Taxes $411,225 $209,550 $52,725 $345,500 $134,980 $51,520 3-b) Times Interest Earned (TIE) ratio tells how many times the interest expense the firm is able to generate its earnings before interest and taxes (EBIT). The more the ratio, the more the efficiency because firm can easily meet out its interest expense obligation for the reporting period concerned. The company is less risky for creditors in the Current Year versus 1 Year Ago because TIE ratio was increased from 3.87 to 4.36 in current year.