Exercise 13-4 Financial Ratios for Debt Management [LO13-4] Comparative financia
ID: 2401100 • Letter: E
Question
Exercise 13-4 Financial Ratios for Debt Management [LO13-4]
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 500,000 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 $23. All of the company’s sales are on account.
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 500,000 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 $23. All of the company’s sales are on account.
Explanation / Answer
Solution:
1)
Times Interest Earned Ratio
This Year
Earnings Before Interest and Taxes (i.e. Net Operating Income)
$20,400
Interest Expense
$960
Times Interest Earned Ratio (Earnings Before Interest and Taxes / Interest Expense)
21.25
Times
2)
Debt to Equity Ratio
Total Debt (Total Liabilities)
$29,320
Stockholder's Equity
$55,993
Debt to Equity Ratio (Total Debt / Total Stockholde's Equity)
0.52
Times
3)
Equity Multiplier
This Year
Total Assets
$85,313,000
Dividend by Number of Shares
500,000 Shares
Equity Multiplier
170.626
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1)
Times Interest Earned Ratio
This Year
Earnings Before Interest and Taxes (i.e. Net Operating Income)
$20,400
Interest Expense
$960
Times Interest Earned Ratio (Earnings Before Interest and Taxes / Interest Expense)
21.25
Times
2)
Debt to Equity Ratio
Total Debt (Total Liabilities)
$29,320
Stockholder's Equity
$55,993
Debt to Equity Ratio (Total Debt / Total Stockholde's Equity)
0.52
Times
3)
Equity Multiplier
This Year
Total Assets
$85,313,000
Dividend by Number of Shares
500,000 Shares
Equity Multiplier
170.626
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