Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.

Kepler Company
Comparative Balance Sheets
		This Year		Last Year
Assets
Current assets:
Cash		$ 50,000		$100,000
Accounts receivable, net		300,000		150,000
Inventory		600,000		400,000
Prepaid expenses		25,000		30,000
Total current assets		$ 975,000		$680,000
Property and equipment, net		125,000		150,000
Total assets		$1,100,000		$830,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$ 400,000		$290,000
Short-term notes payable		200,000		60,000
Total current liabilities		$ 600,000		$350,000
Long-term bonds payable, 12%		100,000		150,000
Total liabilities		$ 700,000		$500,000
Stockholders' equity:
Common stock (100,000 shares)		200,000		200,000
Retained earnings		200,000		130,000
Total liabilities and stockholders' equity		$1,100,000		$830,000

Kepler Company
Comparative Income Statements
		This Year		Last Year
Sales		$ 950,000		$ 900,000
Less: Cost of goods sold		500,000		490,000
Gross margin		$ 450,000		$ 410,000
Less: Selling and administrative expenses		275,000		260,000
Operating income		$ 175,000		$ 150,000
Less: Interest expense		12,000		18,000
Income before taxes		$ 163,000		$ 132,000
Less: Income taxes		65,200		52,800
Net income		$ 97,800		$ 79,200
Less: Dividends		27,800		19,200
Net income, retained		$ 70,000		$ 60,000

Required:

Note: Round all answers to two decimal places.

1. Compute the following for each year:

	This Year	Last Year
a. The times-interest-earned ratio	___________ times	___________ times
b. The debt ratio	___________	___________

2. CONCEPTUAL CONNECTION: Does Kepler have too much debt? What other information would help in answering this question?

There appears to be good income coverage of interest. The debt ratio is over 50%, but whether this is good or bad depends to some extent on what is normal for the firms industry. The fact that the proportion of debt has increased is certainly a negative factor. Knowing the industrial statistics would help in the assessment.