M10-13 (Algo) Computing the Debt-to-Assets Ratio and the Times Interest Earned Ratio [LO 10-5]

The balance sheet for Shaver Corporation reported the following: cash, $12,500; short-term investments, $17,500; net accounts receivable, $50,000; inventory, $55,000; prepaids, $17,500; equipment, $103,000; current liabilities, $55,000; notes payable (long-term), $85,000; total stockholders equity, $115,500; net income, $4,820; interest expense, $7,400; income before income taxes, $9,780.

Required:

1. Compute Shavers debt-to-assets ratio and times interest earned ratio.

2-a. Based on these ratios, does it appear Shaver relies mainly on debt or equity to finance its assets?

2-b. Is it probable that Shaver will be able to meet its future interest obligations?