Question

Ratio of Liabilities to Stockholders' Equity and Number of Times Interest Earned

The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years:

	Current Year		Previous Year
Accounts payable	$340,000		$101,000
Current maturities of serial bonds payable	230,000		230,000
Serial bonds payable, 10%	930,000		1,160,000
Common stock, $1 par value	50,000		70,000
Paid-in capital in excess of par	550,000		550,000
Retained earnings	1,900,000		1,510,000

The income before income tax was $359,600 and $314,600 for the current and previous years, respectively.

a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place.

Current year
Previous year

b. Determine the times interest earned ratio for both years. Round to one decimal place.

Current year
Previous year

c. The ratio of liabilities to stockholders' equity has and the number of times bond interest charges were earned has from the previous year. These results are the combined result of a income before income taxes and

Answer 1

a.

	Ratio of Liabilities to Stockholders' Equity
Current Year	0.6
Previous Year	0.7

Ratio of Liabilities to Stockholders' Equity = ( Accounts Payable + Current Maturities of Serial Bonds Payable + Serial Bonds Payable ) / ( Common Stock + Paid-in Capital in Excess of Par + Retained Earnings )

b.

	Times Interest Earned
Current Year	4.1 times
Previous Year	3.3 times

Times interest earned = EBIT / Interest Expense

EBIT = Income before Income Tax + Interest Expense.