1.
Laura Bella Company reports the following statement of income:
Operating Revenues $4,800
Costs and Expenses:
Cost of Sales (2,000)
Selling, Service, Administrative, and General Expense (1,500)
Income Before Interest Expense and Income Taxes $1,300
Interest Expense (180)
Income Before Income Taxes $1,120
Income Taxes (350)
Net Income $ 770
Note: Depreciation expense totals $300; preferred dividends total $60; operating lease payments total
$180. Assume that 1/3 of operating lease payments is for interest.
Required:
a. Compute the times interest earned.
b. Compute the fixed charge coverage.
2 . Amsterdam Antiques reported the following comparative income figures in 2012.
(in thousands)
2010 2009
Net sales $701 $646
Other income 10 8
$711 $654
Costs and expenses:
Cost of goods sold $472 $408
Selling and general expenses 176 156
Interest 28 22
$676 $586
Income before income taxes and extraordinary items $ 35 $ 68
Income taxes (15) (30)
Income before extraordinary items $ 20 $ 38
Extraordinary items¾losses from fire 18
Net income $ 20 $ 20
Your boss, the president of Amsterdam bank, is concerned about Amsterdam's borrowing capacity. A
representative of Amsterdam Antiques feels that there should be no problem, since net income are the
same with slightly higher sales.
Required:
Compute times interest earned and comment on the bank's position.
3. Aristocrats Art reported the following trend analysis to its bank as an attachment to a loan application.
2012 2011 2010
Fixed Charge Ratio 4.00 2.50 1.54
Times Interest Earned Ratio 4.94 3.17 2.08
Debt Ratio 0.47 0.51 0.56
Debt to Tangible Net Worth Ratio 0.91 1.06 1.36
You have been asked to evaluate the long-term borrowing capacity. You know that a rule of thumb for this
industry for the debt/ equity ratio is 1 to 1.
Required:
a. Compute the debt/equity ratio for 2012, 2011, and 2010, using the debt ratio as a guide.
b. Comment on the long-term borrowing ability of this firm.
4.You have been asked to evaluate the long-term borrowing position of Client, Inc. However, you were
given only the following limited information.
Bonds payable, 12% $1,000,000
Stockholders' equity 1,800,000
Current assets 1,870,000
Tangible assets, net 1,600,000
Intangible assets 40,000
Investments 120,000
Other assets 90,000
Sales 4,000,000
Operating expenses 3,620,000
Required:
Assuming that this is the only information you will receive, estimate the following ratios:
a. Times interest earned ratio
b. Debt ratio
c. Debt/equity ratio
d. Debt to tangible net worth ratio
5. Required:
Indicate the effect of each of the following transactions on the ratios listed. Use + to indicate an increase,
- to indicate a decrease, and 0 to indicate no effect. Assume an initial times interest earned ratio of 3 to 1,
debt ratio of 0.5 to 1, debt/equity ratio of 1.0 to 1, and total debt to tangible net worth ratio of 1.1 to 1.
Times Debt Total Debt
Interest Debt Equity Tangible Net
Transaction Earned Ratio Ratio Ratio Worth Ratio
a. Collection of accounts receivable. ____ ____ ____ ____
b. Firm has decreasing profits due to ____ ____ ____ ____
rising cost of sales.
c. Firm appropriates a substantial ____ ____ ____ ____
amount for expansion.
d. Conversion of preferred stock to ____ ____ ____ ____
common.
e. Repayment of a short-term bank loan ____ ____ ____ ____
(ignore interest).
f. Payment for a valuable trademark. ____ ____ ____ ____
g. The stock is split two for one. ____ ____ ____ ____
h. Purchase of equipment financed by a ____ ____ ____ ____
long-term note (consider interest).
i. Conversion of bonds to stock. ____ ____ ____ ____
j. Declaration and payment of dividend. ____ ____ ____ ____
k. The firm experiences a rise in the rate ____ ____ ____ ____
charged on its line of credit.
