The following information comes from the financial statements of Travis Campbell Company: Total liabilities. $100,000 Total stockholders'

The following information comes from the financial statements of Travis Campbell Company:

Transcribed Image Text:

Total liabilities. $100,000 Total stockholders' equity 80,000 Property, plant, and equipment 110,000 Sales 500,000 Earnings before income taxes 11,000 23,000 Interest expense In addition, Travis Campbell has a large number of operating leases. The payments on these operating leases total $30,000 per year for the next 10 years. The present value of the economic obligation associated with these operating leases is $180,000. Of course, because these are op- erating leases, this economic obligation is off the balance sheet. Compute the following ratio values: 1. Debt ratio. HINT: Remember the accounting equation. 2. Debt ratio assuming that Travis Campbell's operating leases are accounted for as capital leases. 3. Asset turnover (sales/total assets). 4. Asset turnover assuming that Travis Campbell's operating leases are accounted for as cap- ital leases. 5. Interpretive Question: You are Travis Campbell's banker. You are concerned that the times interest earned ratio is not accurately reflecting the risk that Travis Campbell will not meet its fixed annual payments because most of those fixed payments are operating lease payments, not interest payments. Design an alternative ratio that will reflect the fact that, like interest payments, operating lease payments are fixed obligations that must be covered through operating profits each year. Compute the value for the ratio that you have designed.