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 $ 1,160 $ 1,320 Accounts receivable, net 9,400 8,400 Inventory 12,900 11,500 Prepaid expenses 660 510 Total current assets 24,120 21,730 Property and equipment: Land 9,300 9,300 Buildings and equipment, net 45,098 37,994 Total property and equipment 54,398 47,294 Total assets $ 78,518 $ 69,024 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 20,200 $ 19,300 Accrued liabilities 1,010 780 Notes payable, short term 0 150 Total current liabilities 21,210 20,230 Long-term liabilities: Bonds payable 9,100 9,100 Total liabilities 30,310 29,330 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 42,208 33,694 Total stockholders' equity 48,208 39,694 Total liabilities and stockholders' equity $ 78,518 $ 69,024

Explanation / Answer

COMPUTATION OF FINANCIAL RATIOS FOR THE YEAR:

(*) Average values = Last year value + This year value / 2

RATIOS FORMULA THIS YEAR 1. Times interest earned ratio Net operating income / Interest expense 15,500 / 910 = 17.03times 2. Debt to equity ratio Long term debt / Total stockholder's Equity 9,100 / 48,208 = 0.18:1 3. Equity multiplier Average total assets / Average stockholder's equity 73,771 / 43,951 = 1.67

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