Comparative financial statements for Weller Corporation, a merchandising company

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 $21. All of the company’s sales are on account.

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

Weller Corporation
Comparative Balance Sheet
(dollars in thousands) This Year Last Year Assets Current assets: Cash $ 1,280 $ 1,330 Accounts receivable, net 10,900 7,100 Inventory 12,400 12,200 Prepaid expenses 750 540 Total current assets 25,330 21,170 Property and equipment: Land 10,200 10,200 Buildings and equipment, net 47,416 42,268 Total property and equipment 57,616 52,468 Total assets $ 82,946 $ 73,638 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 19,900 $ 19,200 Accrued liabilities 1,050 740 Notes payable, short term 0 120 Total current liabilities 20,950 20,060 Long-term liabilities: Bonds payable 9,700 9,700 Total liabilities 30,650 29,760 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 46,296 37,878 Total stockholders' equity 52,296 43,878 Total liabilities and stockholders' equity $ 82,946 $ 73,638

Explanation / Answer

1. Times interest earned ratio = EBIT/interest expenses

                                             =15400/970

TImes interest earned ratio = 15.88 times

2) Debt to euity ratio = Total debt / Total equity

                               = 30650/52296

Debt to equity ratio = 0.59

3) Equity multiplier = Average total assets/average shareholder's equity

                           = 78292/48087

Equity multiplier = 1.63

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