Question

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 700,000 shares of common stock were outstanding. The interest rate on the bond payable was 10%, 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 this year was $23. All of the company’s sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands ) This Year Last Y ear Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses s 1,140 s 1,310 7,400 13,000 11,500 650 20,860 9,500 770 24,410 Total current assets Property and equipment: Land 9,600 43,273 42,409 52187352,009 $77,283 $72,869 9,600 Buildings and equipment, net Total property and equipment Total assets Liabilities and Stockholders Equity current liabilities: Accounts payable $19,000 $19,300 800 130 20,230 Accrued liabilities 920 Notes payable, short term Total current liabilities Long-term liabilities: 19,920 8,600 28,52028,830 8,600 Bonds payable Total liabilities Stockholders' equity: 2,000 , 000 6,000 42,76338, 039 44,039 $77,283 $72,869 Common stock 2,000 Additional paid-in capital Total paid in capital Retained earnings Total stockholders' equity Total 1iabilities and stockholders' equity 4,000 6, 000 48,763

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

Answer 1

(1)-Times interest earned ratio

Times interest earned ratio = Net Operating Income / Interest Expenses

= $9,200 / $860

= 10.70 Times

(2)-Debt-to-equity ratio

Debt-to-equity ratio = Total Liabilities / Total Stockholders’ Equity

= $28,520 / $48,763

= 0.58

(3)-Equity multiplier

Equity multiplier = Total Assets / Total Stockholders’ Equity

= $77,283 / $48,763

= 1.58 Times

Equity multiplier can also be calculated by using the following formula

Equity multiplier = 1 + Debt-to-equity ratio

= 1 + 0.58

= 1.58 Times