Question

Long-Term Solvency Ratios Summary data from year-end financial statements of Palm Springs Company for 2017 follow.

Summary Income Statement Data
Sales $11,692,900
Cost of goods sold 5,135,000
Selling expenses 938,000
Administrative expenses 780,000
Interest expense 2,210,000
Income tax expense 905,000 9,968,000
Net income $1,724,900
Summary Balance Sheet Data
Cash $117,000
Total liabilities $900,000
Noncash assets 1,183,000
Stockholders' equity 400,000
Total assets $1,300,000
Total liabilities and equity $1,300,000
Round answers to two decimal places.
a. Compute the ratio of times-interest-earned.
b. Compute the debt-to-equity ratio.

Answer 1

a. Compute the ratio of times-interest-earned.

times-interest-earned = EBIT / interest expense

• EBIT = $4,839,900
• interest expense = $2,210,000

times-interest-earned = $4,839,900 / $2,210,000 = 2.19

b. Compute the debt-to-equity ratio.

debt-to-equity ratio = total liabilities / total stockholders' equity

• total liabilities = $900,000
• total stockholders' equity = $400,000

debt-to-equity ratio = $900,000 / $400,000 = 2.25