Question

Hi, please help me to check and see if I am on the right track. (Specifically for "requirement 3", I don't know if I choose the correct one, each blank for requirement 3 contains 2 options, one is the one that I chose, the other one is completely opposite than the one that I selected. please let me know the answer for requirement 3 and help me to check if I am doing correct for requirement 1 and 2) Thank you.

The classified balance sheet and selected income statement data for Roberts, Inc., as of December 31, 2018, are presented next. (Click the icon to view the classified balance sheet.) (Click the icon to view the selected income statement data.) Read the requirements. Requirement 1. Calculate Roberts, inc. s debt ratio and interest coverage ratio as of December 31, 2018. Round to two decimal places. Begin by calculating Roberts, Inc.'s debt ratio. Select the formula and then enter the amounts to calculate the ratio. (Abbreviation used: EBIT = Earnings before interest and taxes. Enter the ratio as a decimal to two places, XX.) Total liabilities Total assets = Debt ratio 162650 3 86400 = 0.42 Now calculate Roberts, Inc.'s interest coverage ratio. Select the formula and then enter the amounts to calculate the ratio. (Abbreviation used: EBIT = Earnings before interest and taxes. Round the ratio to two decimal places, XX.) EBIT Interest expense Interest coverage ratio = = 97500 1 18200 5.36 Requirement 2. What percentage of Roberts, Inc.'s assets belong to the stockholders? (Enter the amount as a whole percent, X%.) 58 % of the company's assets belong to the stockholders. Requirement 3. Would you be willing to extend credit to Roberts, Inc.? Why or why not? (Assume that the average debt ratio for most companies ranges from 0.57 to 0.67 and the average interest coverage ratio for most companies ranges from 1 to 3.) indicating that its ability to repay any additional debt is strong. The Yes, I would be willing to extend credit to Roberts since the company's debt ratio is high interest coverage ratio also supports my decision. high Choose from any list or enter any number in the input fields and then continue to the low on.

Answer 1

Requirement 1:

Debt Ratio = Total Debt/Total Assets

=(22650+160000)/386400

=0.42

Requirement 2

Interest Coverage Ratio = EBIT/Interest Expense

=97500/18200

=5.36

Hence Requirement 1 and 2 are correctly solved by you.

Requirement 3

Average Debt Ratio for most companies is 0.57 to 0.67 and Average Interest Coverage Ratio is 1 to 3

Interpretation of Ratios

Debt Ratio : It can be interpreted as the proportion of a company’s assets that are financed by debt. The higher the debt ratio, the more leveraged a company is, implying greater financial risk. In case of Roberts Inc., its debt ratio is 0.42 which is lower than the debt ratio of most companies being 0.57 to 0.67. Low Debt ratio suggests Roberts Inc is financially stable and has strong ability to repay. Blank 1 should be Yes I would, blank 2 should be low, blank 3 should be strong.

Interest coverage ratio : The interest coverage ratio measures how many times a company can cover its current interest payment with its available earnings. The lower the ratio, the more the company is burdened by debt expense. In case of Roberts Inc, the Interest coverage ratio is 5.36 which is higher than the interest coverage ratio of most companies being 1-3. High Interest coverage ratio is in favor of extending credit to Roberts Inc. Hence blank 4 would be high and blank 5 would be also supports my decision

Final answer

Yes, i would be willing to extend credit to Roberts inc since the company's debt ratio is low indicating that its ability to repay any additional debt is strong. The high interest coverage ratio also supports my decision.