Use the following financial information for Questions 1-4 below:

From the income statement:

Depreciation expense Interest expense	$150,000 20,000
Income tax Net income	28,000 145,000

From the balance sheet:

Current liabilities	$90,000
Long-term debt	700,000
Deferred income taxes	80,000
Total Liabilities	$870,000
Preferred stock	5,000
Common stock	255,000
Premium on common stock	162,000
Retained earnings	668,000
Total Stockholders Equity	$1,090,000
Total Liabilities & Stockholders Equity	$1,960,000

1. What is the Times Interest Earned ratio?

2. What is the Debt/Assets (Debt) ratio?

3. What is the Debt*/Equity ratio?

*Use Long-term debt

4. Consider the additional information for the above analysis:

1. Times Interest Earned: Compare the current year result above (better or worse) to

i) Company prior year result of 6.0 (better or worse?)

ii) Industry average: 5.0

Interpret your findings: Are the results acceptable? Why?

2. Debt /Equity ratio: Compare current year result above ( more or less risk) to

i) Company prior year result of 0.4

ii) Industry average: 0.5

Interpret your findings: Are the results acceptable? Why?

______5. a. T or F A decreasing debt/asset ratio indicates a company is funding more assets with debt and presents less risk for creditors. (if false, identify error)

b. T or F Relatively high, stable coverage for the times interest earned ratio would indicate a good record of covering interest expense. (if false, identify error)

______6. In considering equity and debt financing, which of the following statements is false?

1. Compared to debt financing, equity is a more expensive source of funding

b. Most firms prefer to have both debt and equity financing

c. In general, the higher the proportion of total debt to equity ratio, the greater the likelihood the firm may have difficulty in meeting its obligations in some future period

d. Both interest and dividend payments are required to be made by the issuing corporation

e. Debt to assets ratio represents: for every $1 of assets, the portion of assets funded by debt

_____7. Tor F The changes in Accounting Standards for leases will require more leases be capitalized and reflected on the balance sheet. The impact of this change is anticipated to increase the debt/equity ratio. (if false, identify error)