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 $25. 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	$	1,120		$	1,340
Accounts receivable, net		11,000			7,400
Inventory		12,500			10,600
Prepaid expenses		780			540
Total current assets		25,400			19,880
Property and equipment:
Land		10,000			10,000
Buildings and equipment, net		42,550			39,740
Total property and equipment		52,550			49,740
Total assets	$	77,950		$	69,620
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,700		$	18,500
Accrued liabilities		1,070			750
Notes payable, short term		0			170
Total current liabilities		19,770			19,420
Long-term liabilities:
Bonds payable		9,000			9,000
Total liabilities		28,770			28,420
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		43,180			35,200
Total stockholders' equity		49,180			41,200
Total liabilities and stockholders' equity	$	77,950		$	69,620

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	73,000		$	65,000
Cost of goods sold		41,000			40,000
Gross margin		32,000			25,000
Selling and administrative expenses:
Selling expenses		10,900			10,300
Administrative expenses		6,500			6,200
Total selling and administrative expenses		17,400			16,500
Net operating income		14,600			8,500
Interest expense		900			900
Net income before taxes		13,700			7,600
Income taxes		5,480			3,040
Net income		8,220			4,560
Dividends to common stockholders		240			600
Net income added to retained earnings		7,980			3,960
Beginning retained earnings		35,200			31,240
Ending retained earnings	$	43,180		$	35,200

Required:

Compute the following financial ratios for this year:

1.	Times interest earned ratio. (Round your answer to 1 decimal place.)

      

2.	Debt-to-equity ratio. (Round your answer to 2 decimal places.)

      

3.	Equity multiplier. (Round your answer to 2 decimal places.)

      

Answer 1

Part-1 - : Times interest earned ratio

For computing Time interest earned ratio = Net Income before Interest and Taxes or EBIT

                                                                                                Interest Expenses

As per above question we have the following amounts given:

Net Income before Interest and Taxes or EBIT = $13,700

Interest Expenses: $900

By taking the above amounts we can calculate

Time Interest earned ration = $13,700   

                                             $900

Time Interest earned ration = 15.2 times

Part-2: Debt-to-equity ratio

For computing Debt - Equity ratio= Total Debt

                                                   Total Equity

As per above question we have the following amounts given :

Step-1: Computation of Total Debt is sum of all long term borrowings and it is given as Bonds Payable is $9,000

Step -2 : Computation of Total Equity is sum of the following

Common Stock	=	$         2,000
Additional Paid Up Capital	=	$         4,000
Retained Capital	=	$       43,180
Total Equity		$       49,180

Step- 3 : Computation of Debt Equity Ratio

= Debt/Equity

=$9,000/$49,180

=0.18 times

Part-3: Computation of Equity multiplier:

For Computing Equity multiplier formula is: Total Assets /Equity

As per above question we have the following amounts given :

Total Assets value = $77,950

Total Equity = $49,180

So, Equity Multiplier = $77,950/$49,180

                                     = 1.59 times