Leverage Ratios

Grammatico Company has just completed its third year of operations. The income statement is as follows:

Sales $2,460,000

Less: Cost of goods sold (1,410,000)

Gross profit margin $1,050,000

Less: Selling and administrative expenses (710,000)

Operating income $340,000

Less: Interest Expense (140,000)

Income before taxes $200,000

Less: Income taxes (68,000)

Net Income $132,000

Selected information from the balance sheet is as follows:

Current liabilities $1,000,000

Long-term liabilities 1,500,000

Total liabilities $2,500,000

Common stock $4,000,000

Retained earnings 750,000

Total equity $4,750,000

Required:

Note: Round answers to two decimal places.

1. Compute the times-interest-earned ratio.

2. Compute the debt ratio.

3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammatico's industry are as follows:

How does Grammatico compare with the industrial norms? Does it have too much debt?