Exercise 16-4 (Static) Financial Ratios for Debt Management [LO16-4]

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 800,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, 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 this year was $18. All of the companys sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 1,280	$ 1,560
Accounts receivable, net	12,300	9,100
Inventory	9,700	8,200
Prepaid expenses	1,800	2,100
Total current assets	25,080	20,960
Property and equipment:
Land	6,000	6,000
Buildings and equipment, net	19,200	19,000
Total property and equipment	25,200	25,000
Total assets	$ 50,280	$ 45,960
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$ 9,500	$ 8,300
Accrued liabilities	600	700
Notes payable, short term	300	300
Total current liabilities	10,400	9,300
Long-term liabilities:
Bonds payable	5,000	5,000
Total liabilities	15,400	14,300
Stockholders' equity:
Common stock	800	800
Additional paid-in capital	4,200	4,200
Total paid-in capital	5,000	5,000
Retained earnings	29,880	26,660
Total stockholders' equity	34,880	31,660
Total liabilities and stockholders' equity	$ 50,280	$ 45,960

Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands)
	This Year	Last Year
Sales	$ 79,000	$ 74,000
Cost of goods sold	52,000	48,000
Gross margin	27,000	26,000
Selling and administrative expenses:
Selling expenses	8,500	8,000
Administrative expenses	12,000	11,000
Total selling and administrative expenses	20,500	19,000
Net operating income	6,500	7,000
Interest expense	600	600
Net income before taxes	5,900	6,400
Income taxes	2,360	2,560
Net income	3,540	3,840
Dividends to common stockholders	320	600
Net income added to retained earnings	3,220	3,240
Beginning retained earnings	26,660	23,420
Ending retained earnings	$ 29,880	$ 26,660

Required:

Compute the following financial ratios for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

3. Equity multiplier.