Question 4 Timmins Company has just completed its third year of operations. The Statement of Comprehensive Income is as follows: Sales Less: Cost of goods sold Gross profit Less : Selling and adminstrative expenses. Operating income Less : Interest expense Income before taxes Less : Income taxes Net income $ 2,460,000 (1,410,000) 1,050,000 (710,000) 340,000 (140,000) 200,000 (68,000) 132,000 Selected information from the Statement of Financial Position is as follows: $ Current liabilities, 1,000,000 Long-term liabiliites 1,500,000 Total liabilities 2,500,000 Common stock/Share capital Betained eatings 4,000,000 750,000 4,750,000 Required: Compute the Following ratios : a) Times-interest-eared ratio b) Debt ratio Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Timmins's industry are as follows: Paragraph C) Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Timmins's industry are as follows: Times-interest-earned: Debt: 2.3, 5.4, 16.1 2.4, 0.8, 0.5 How does Timmins compare with the industrial norms? Does it have too much debts? Solution a) Times-interest-earned ratio = (Income before taxes + Interest expense) Interest expense b) Debt ratio = Total liabilities/Total assets