Exercise 14-4 Financial Ratios for Debt Management [LO14-4]

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 companys common stock at the end of the year was $28. All of the companys sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	1,270		$	1,410
Accounts receivable, net		9,000			7,300
Inventory		12,500			10,800
Prepaid expenses		760			670
Total current assets		23,530			20,180
Property and equipment:
Land		9,100			9,100
Buildings and equipment, net		44,760			43,520
Total property and equipment		53,860			52,620
Total assets	$	77,390		$	72,800
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	20,400		$	19,300
Accrued liabilities		960			810
Notes payable, short term		0			260
Total current liabilities		21,360			20,370
Long-term liabilities:
Bonds payable		10,000			10,000
Total liabilities		31,360			30,370
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		40,030			36,430
Total stockholders' equity		46,030			42,430
Total liabilities and stockholders' equity	$	77,390		$	72,800

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year			Last Year
Sales	$	66,000		$	65,000
Cost of goods sold		41,000			36,000
Gross margin		25,000			29,000
Selling and administrative expenses:
Selling expenses		10,900			10,600
Administrative expenses		6,700			7,000
Total selling and administrative expenses		17,600			17,600
Net operating income		7,400			11,400
Interest expense		1,000			1,000
Net income before taxes		6,400			10,400
Income taxes		2,560			4,160
Net income		3,840			6,240
Dividends to common stockholders		240			450
Net income added to retained earnings		3,600			5,790
Beginning retained earnings		36,430			30,640
Ending retained earnings	$	40,030		$	36,430

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.