Question

In: Finance

2018 2017 Current assets $ 2,731,020         $ 2,364,916 Property and equipment, net 10,960,286            8,516,833...

2018

2017

Current assets

$ 2,731,020

        $ 2,364,916

Property and equipment, net

10,960,286

           8,516,833

Intangible assets, at cost

   less applicable amortization

    294,775

              255,919

$13,986,081

       $11,137,668

Current liabilities

$ 3,168,123

        $ 2,210,735

Deferred federal income taxes

160,000

                26,000

Mortgage note payable

456,000

                       —

Stockholders' equity

10,201,958

         8,900,933

$13,986,081

       $11,137,668

Net sales

$33,410,599

       $25,804,285

Cost of goods sold

(30,168,715)

        (23,159,745

Selling and administrative expense

(2,000,000)

         (1,500,000)

Interest expense

(216,936)

              (39,456)

Income tax expense

   (400,000)

            (300,000)

Net income

$   624,948

         $   805,084

Note: One-third of the operating lease rental charge was $100,000 in 2018 and $50,000 in 2017. Capitalized interest totaled $30,000 in 2018 and $20,000 in 2017.

Required:

  1. Based on the above data for both years, compute for the two years 2018 , and 2017 with explanation (give your comments on each ratio) .
    1. times interest earned

  1. fixed charge

  1. debt ratio

  1. debt/equity ratio

  1. debt to tangible net worth

           

  1. Comment on the firm's long-term borrowing ability based on the analysis.

Solutions

Expert Solution

Answer- FOR YEAR 2018

1. Interest Earned Ratio = EBIT/Interest expense

Now, EBIT = Net Sales-COGS-selling & Administrative expense

= $ 1,241,884

Therefore, Interest Earned Ratio= 1,241,884/216,936 = 5.72:1.

FOR YEAR 2017

EBIT= $ 1,144,540

So,  Interest Earned Ratio= 1,144,540/39,456 = 29.01:1.

2. Fixed charge ratio = (EBIT+FCBT) / (FCBT+INTEREST)

For 2018, = (1241884+100000) / (100000+216936)

= 4.23:1.

For 2017, = (1144540+50000) / (50000+39456)

= 13.35:1.

3. Debt Ratio = Total liabilites / Total assets

For 2018, = 13986081/13691306 = 1.02:1.

For 2017, = 11137668/10881749 = 1.02:1

4. Debt Equity Ratio = Total Liabilities/ STockholders equity

fOR 2018, = 1.37:1

FOR 2017, = 1.25:1.

5. Debt to Tangible Net Worth = Total Liabilities/Tangible Net Worth

For 2018, = 5.12:1.

For 2017, = 4.71:1.

For a firm being financially sustainable means being able to carry its debt. Generally, greater amount of company's debt means greater financial risk of its bankruptcy. Long-term debt paying ability of a firm can be viewed as indicated by the income statement and by the balance sheet.

jeff jeffy answered 1 year ago
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