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 bonds, which were sold at their face value, was 10%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the year was $30. All of the company’s sales are on account.

account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	1,210		$	1,360
Accounts receivable, net		10,400			7,500
Inventory		12,400			11,000
Prepaid expenses		660			580
Total current assets		24,670			20,440
Property and equipment:
Land		9,300			9,300
Buildings and equipment, net		43,094			41,722
Total property and equipment		52,394			51,022
Total assets	$	77,064		$	71,462
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,900		$	19,100
Accrued liabilities		1,080			770
Notes payable, short term		0			100
Total current liabilities		19,980			19,970
Long-term liabilities:
Bonds payable		8,800			8,800
Total liabilities		28,780			28,770
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		42,284			36,692
Total stockholders' equity		48,284			42,692
Total liabilities and stockholders' equity	$	77,064		$	71,462

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	70,000		$	65,000
Cost of goods sold		42,000			36,000
Gross margin		28,000			29,000
Selling and administrative expenses:
Selling expenses		10,600			10,900
Administrative expenses		6,800			6,800
Total selling and administrative expenses		17,400			17,700
Net operating income		10,600			11,300
Interest expense		880			880
Net income before taxes		9,720			10,420
Income taxes		3,888			4,168
Net income		5,832			6,252
Dividends to common stockholders		240			300
Net income added to retained earnings		5,592			5,952
Beginning retained earnings		36,692			30,740
Ending retained earnings	$	42,284		$	36,692

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

Answer 1

1]	Times interest earned ratio = EBIT/Interest expense = 10600/880 =	12.05
2]	Debt to equity ratio = Total liabilities/Total stockholders' equity = 28780/48284 =	0.60
3]	Equity multiplier = Total assets/Total stockholders' equity = 77064/48284 =	1.60