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 bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company’s common stock at the end of this year was $21. 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	$	1,080		$	1,350
Accounts receivable, net		10,300			6,700
Inventory		13,300			12,100
Prepaid expenses		630			630
Total current assets		25,310			20,780
Property and equipment:
Land		10,500			10,500
Buildings and equipment, net		47,698			40,894
Total property and equipment		58,198			51,394
Total assets	$	83,508		$	72,174
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,600		$	18,700
Accrued liabilities		1,020			740
Notes payable, short term		0			270
Total current liabilities		19,620			19,710
Long-term liabilities:
Bonds payable		8,600			8,600
Total liabilities		28,220			28,310
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		49,288			37,864
Total stockholders' equity		55,288			43,864
Total liabilities and stockholders' equity	$	83,508		$	72,174

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	72,000		$	66,000
Cost of goods sold		34,000			35,000
Gross margin		38,000			31,000
Selling and administrative expenses:
Selling expenses		10,800			10,200
Administrative expenses		6,900			6,900
Total selling and administrative expenses		17,700			17,100
Net operating income		20,300			13,900
Interest expense		860			860
Net income before taxes		19,440			13,040
Income taxes		7,776			5,216
Net income		11,664			7,824
Dividends to common stockholders		240			600
Net income added to retained earnings		11,424			7,224
Beginning retained earnings		37,864			30,640
Ending retained earnings	$	49,288		$	37,864

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

Answer 1

1. Times interest earned ratio
Net operating income before	/	Interest expense	=	Times interest earned ratio
interest expense and income taxes
20,300.00	/	860.00	=	23.60
2. Debt to equity ratio
Total liabilities	/	Stockholders’ equity	=	Debt to equity ratio
28,220.00	/	55,288.00	=	0.51	:1
3. Equity multiplier
Average total assets	/	Average stock holder’s equity	=	Equity multiplier
77,841.00	/	49,576.00	=	1.57
Explanation
Average total assets	=	(83,508 + 72,174)/2	=	$ 77,841.00
Average stock holder’s equity	=	(55,288 + 43,864)/2	=	$ 49,576.00