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 administrctive expensas

$710,000$

Operating income$=340,000$

Less Interest expense$=(140,000)$

Income belore taxes$=200000$

Less: Income taxes$=(68,000)$

Not income$=$$$132000$

Selected information from the balance sheet is as follows:

Current liabilities$=1000000$

Long term liabilities$=1500000$

Tolal liabilities$=2500000$

Common stock$=$$$4000000$

Retained earnings$=750000$

Tolal equity$=4750000$

Required:

Note: Round answers to two decimal places.

Compute the times$-$interest$-$earned ratio.

Compute the debt ratio.

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:Times$-$ interest $-$ earned

$2\mathrm{.}4,5\mathrm{.}4,16\mathrm{.}1$

Debt

$0\mathrm{.}3,0\mathrm{.}8.2\mathrm{.}4$

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