Question

The balance sheet for Shaver Corporation reported the following: cash, $13,500; short-term investments, $18,500; net accounts receivable, $52,000; inventories, $57,000; prepaids, $18,500; equipment, $111,000; current liabilities, $57,000; notes payable (long-term), $87,000; total stockholders’ equity, $126,500; net income, $5,020; interest expense, $7,800; income before income taxes, $10,380.

1.Compute Shaver’s debt-to-assets ratio and times interest earned ratio. (Round your answers to 2 decimal places.)

2. Based on these ratios, does it appear Shaver relies mainly on debt or equity to finance its assets?

3. Is it probable that Shaver will be able to meet its future interest obligations?

Answer 1

ANSWER:

1) Debt to Asset: 1.88

Time interest earned ratio: 2.20

Working:

Debt to asset = (cash, $13,500 + short-term investments, $18,500 + net accounts receivable, $52,000 + inventory, $57,000 + prepaids, $18,500 + equipment, $111,000) / ( current liabilities $57,000 + notes payable (long-term), $87,000) =270500 /144000 = 1.88

$10,380 (Income Before Income Taxes) – $ 5,020 (Net Income) = 5,360 (Income Tax Expense)

Time interest earned ratio: (Net Income + Interest Expense + Income Tax Expense) / Interest Expense

= ($5,020 + $7,800 + $5360) / $7,800= 2.33

2) Debt because when the ratio is exceeds 0.5, most of the company's assets are financed through debt

3) Yes, Shaver will be able to meet the future interest obligations

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