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 600,000 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 $26. All of the company’s sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	1,170		$	1,240
Accounts receivable, net		10,500			6,600
Inventory		13,700			10,700
Prepaid expenses		740			650
Total current assets		26,110			19,190
Property and equipment:
Land		9,400			9,400
Buildings and equipment, net		42,134			44,122
Total property and equipment		51,534			53,522
Total assets	$	77,644		$	72,712
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	19,000		$	17,700
Accrued liabilities		950			700
Notes payable, short term		0			290
Total current liabilities		19,950			18,690
Long-term liabilities:
Bonds payable		9,800			9,800
Total liabilities		29,750			28,490
Stockholders' equity:
Common stock		2,000			2,000
Additional paid-in capital		4,000			4,000
Total paid-in capital		6,000			6,000
Retained earnings		41,894			38,222
Total stockholders' equity		47,894			44,222
Total liabilities and stockholders' equity	$	77,644		$	72,712

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	66,000		$	65,000
Cost of goods sold		40,000			34,000
Gross margin		26,000			31,000
Selling and administrative expenses:
Selling expenses		11,300			10,500
Administrative expenses		7,200			6,300
Total selling and administrative expenses		18,500			16,800
Net operating income		7,500			14,200
Interest expense		980			980
Net income before taxes		6,520			13,220
Income taxes		2,608			5,288
Net income		3,912			7,932
Dividends to common stockholders		240			450
Net income added to retained earnings		3,672			7,482
Beginning retained earnings		38,222			30,740
Ending retained earnings	$	41,894		$	38,222

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

(For all requirements, round your answers to 2 decimal places.)

	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

= $7,500 / $980

= 7.65 Times

(2)-Debt-to-equity ratio

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

= $29,750 / $47,894

= 0.62 Times

(3)-Equity multiplier

Equity multiplier = Total Assets / Total Stockholders’ Equity

= $77,644 / $47,894

= 1.62 Times

Equity multiplier can also be calculated by using the following formula

Equity multiplier = 1 + Debt-to-equity ratio

= 1 + 0.62

= 1.62 Times