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 $26. 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	$	1,130		$	1,310
Accounts receivable, net		9,600			8,100
Inventory		12,100			11,200
Prepaid expenses		780			660
Total current assets		23,610			21,270
Property and equipment:
Land		11,000			11,000
Buildings and equipment, net		50,014			39,512
Total property and equipment		61,014			50,512
Total assets	$	84,624		$	71,782
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,600		$	17,900
Accrued liabilities		1,050			820
Notes payable, short term		0			190
Total current liabilities		19,650			18,910
Long-term liabilities:
Bonds payable		9,300			9,300
Total liabilities		28,950			28,210
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		49,674			37,572
Total stockholders' equity		55,674			43,572
Total liabilities and stockholders' equity	$	84,624		$	71,782

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	73,000		$	64,000
Cost of goods sold		34,000			34,000
Gross margin		39,000			30,000
Selling and administrative expenses:
Selling expenses		11,000			10,200
Administrative expenses		6,500			6,900
Total selling and administrative expenses		17,500			17,100
Net operating income		21,500			12,900
Interest expense		930			930
Net income before taxes		20,570			11,970
Income taxes		8,228			4,788
Net income		12,342			7,182
Dividends to common stockholders		240			450
Net income added to retained earnings		12,102			6,732
Beginning retained earnings		37,572			30,840
Ending retained earnings	$	49,674		$	37,572

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.

(For all requirements, round your answers to 2 decimal places.)

Answer 1

1.	Times interest earned ratio = Net operating income / Interest expense	$21,500 / 930 = $23.12
2.	Debt to equity ratio = Total liabilities / Total equity	$28,950 / 55,674 = 0.52
3.	Equity multiplier = Average assets / Average equity Average = Beginning balance+Ending balance / 2	$78,203 / 49,623 = 1.58