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 700,000 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 the year was $20. 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	$	1,100		$	1,410
Accounts receivable, net		9,800			8,400
Inventory		13,600			11,200
Prepaid expenses		650			630
Total current assets		25,150			21,640
Property and equipment:
Land		10,700			10,700
Buildings and equipment, net		47,889			42,067
Total property and equipment		58,589			52,767
Total assets	$	83,739		$	74,407
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	20,000		$	19,200
Accrued liabilities		940			730
Notes payable, short term		0			290
Total current liabilities		20,940			20,220
Long-term liabilities:
Bonds payable		8,800			8,800
Total liabilities		29,740			29,020
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		47,999			39,387
Total stockholders' equity		53,999			45,387
Total liabilities and stockholders' equity	$	83,739		$	74,407

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	68,000		$	65,000
Cost of goods sold		34,000			32,000
Gross margin		34,000			33,000
Selling and administrative expenses:
Selling expenses		11,200			10,500
Administrative expenses		7,100			6,500
Total selling and administrative expenses		18,300			17,000
Net operating income		15,700			16,000
Interest expense		880			880
Net income before taxes		14,820			15,120
Income taxes		5,928			6,048
Net income		8,892			9,072
Dividends to common stockholders		280			525
Net income added to retained earnings		8,612			8,547
Beginning retained earnings		39,387			30,840
Ending retained earnings	$	47,999		$	39,387

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.)

Answer 1

Following are the financial ratios for this year:

1. Times interest earned ratio:

= Income before Interest and taxes (EBIT) /  Interest Expenses

= 15700/880

= 17.84 times

2. Debt-to-equity ratio :

= Debt/ Equity

= 8800/ 6000+47999

=0.162

3. Equity multiplier :

= Total assets / Total stockholder's equity

= 83739/53999

= 1.55