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Ratios Analyzing Long-Term Firm Solvency
The following information is available for Banner Company:

Annual Data 2019 2018
Interest expense $85,000 $82,000
Income tax expense 203,500 185,000
Net income 496,500 425,000
Capital expenditures 320,000 380,000
Cash provided by operating activities 450,000 390,000

Year-End Data Dec. 31, 2019 Dec. 31, 2018
Total liabilities $2,400,000 $1,900,000
Total stockholders’ equity 4,200,000 3,800,000

Calculate the following: Note: Round all answers to two decimal places.

a. 2016 debt-to-equity ratio.b. 2016 times-interest-earned ratio.

Respuesta :

Answer:

0.57 and 9.24 times

Explanation:

The computation is shown below:

a. Debt to equity ratio

= Total Liabilities ÷ Share holders' equity

= $2,400,000 ÷ $4,200,000

= 0.57

And, the times interest earned ratio is

= EBIT ÷ interest expense

where,

EBIT is

= Net income + taxes + interest

= $496,500 + $203,500 + $85,000

= $785,000

And, the interest expense is $85,000

So, times interest earned ratio is

= $785,000  ÷ $85,000

= 9.24 times

We simply applied the above formulas

Plus the year is 2019 not 2016

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a. Based on the information given the 2016 debt-to-equity ratio is 0.57.

b.  Based on the information given the 2016 times-interest-earned ratio is 9.24 times.

a. 2016 Debt equity ratio:

Debt equity ratio=debt/equity

Debt equity ratio=$2,400,000/$4,200,000

Debt equity ratio=0.57

b. 2016 Times interest earned ratio:

Times interest earned ratio=Net income before interest tax expense/interest expense

Times interest earned ratio=($496,500+$85,000+$203,500)/$85,000

Times interest earned ratio=$785,000/$85,000

Times interest earned ratio=9.24 times

Inconclusion  the 2016 debt-to-equity ratio is 0.57 and  the 2016 times-interest-earned ratio is 9.24 times.

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