Question

Compute Financial ratios:

Price-earnings, Cash Dicidend payot, Debt Ratio, Debt-to-Equity, and Times Interest earned

Orange Company
Income Statement
For the Years Ended December 31
				2013	2012
Net sales (all on account)				$            600,000	$                520,000
Expenses:
Cost of Goods Sold				$            415,000	$                354,000
Selling and administrative				$            120,800	$                114,600
Interest Expense				$                7,800	$                    6,000
Income Tax Expense				$              18,000	$                  14,000
Total expenses				$            561,600	$                488,600
Net Income				$              38,400	$                  31,400
Additional Data:
1. The common stock recently sold at $19.50 per share.
2. Cash dividends in the amount of $15,400 were paid-out in 2013. Orange Company Balance Sheets December 31 2013 2012 Assets Current Assets Cash $        21,000 $        18,000 Short-term investments $        18,000 $        15,000 Accounts Receivable $        86,000 $        74,000 Inventory $        90,000 $        70,000 Total Current Assets $      215,000 $      177,000 Plant Assets $      423,000 $      383,000 Total Assets $      638,000 $      560,000 Liabilities and Stockholder's Equity Current Liabilities Accounts Payable $      122,000 $      110,000 Income Taxes Payable $        23,000 $        20,000 Total Curent Liabilities $      145,000 $      130,000 Long-term Liabilities Bonds Payable $      120,000 $        80,000 Total Liabilities $      265,000 $      210,000 Stockholder's Equity Common Stock ($5 par value) $      150,000 $      150,000 Retained Earnings $      223,000 $      200,000 Total Stockholder's Equity $      373,000 $      350,000 Total Liabilities and Stockholder's Equity $      638,000 $      560,000

Answer 1

Solution: Calculation of various financial ratios for the year 2013:

1. Price-Earnings ratio = Market value per share / Earning per share = 19.5/1.28 = 15.23

Note: Earning per share = Net Income / common shares = 38400/30000 = $1.28

2. Cash-Dividend Payout ratio = Cash Dividend / Net Income = 15400/38400 = 0.401 or 40.10%

3. Debt ratio = Total liabilities / Total Assets = 265000/638000 = 0.4153 or 41.53%

4. Debt-to-equity ratio = Total liabilities / Total equity = 265000/373000 = 0.7104 or 71.04%

5. Times Interest Earned ratio = EBIT / Interest Expense = (600000-415000-120800) / 7800

= 8.23 times