Leverage Ratios Grammatico Company has just completed its third year of operations. The income statement is as follows: Sales $ 2,460,000 Less: Cost of goods sold 1,410,000 Gross profit margin $ 1,050,000 Less: Selling and administrative expenses 710,000 Operating income $ 340,000 Less: Interest expense 140,000 Income before taxes $ 200,000 Less: Income taxes 68,000 Net income $ 132,000 Selected information from the balance sheet is as follows: Current liabilities $1,000,000 Long-term liabilities 1,500,000 Total liabilities $2,500,000 Common stock $4,000,000 Retained earnings 750,000 Total stockholders' equity $4,750,000 Required: Note: Round answers to two decimal places. 1. Compute the times-interest-earned ratio. fill in the blank 1 2. Compute the debt ratio. fill in the blank 2 3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammatico’s industry are as follows: Time-interest-earned 2.4, 5.4, 16.1 Debt 0.3, 0.8, 2.4 How does Grammatico compare with the industrial norms? Does it have too much debt? The times-interest-earned ratio is very close to the lower quartile, which means that relative to most companies in the industry, Grammatico Company has a expense burden (relative to its income). Its debt ratio is in the lower quartile, which means that the company have additional credit. Because of its interest expense and income level, however, Grammatico should be very careful about taking on additional debt.
Leverage Ratios
Grammatico Company has just completed its third year of operations. The income statement is as follows:
Sales $ 2,460,000
Less: Cost of goods sold 1,410,000
Gross profit margin $ 1,050,000
Less: Selling and administrative expenses 710,000
Operating income $ 340,000
Less: Interest expense 140,000
Income before taxes $ 200,000
Less: Income taxes 68,000
Net income $ 132,000
Selected information from the
Current liabilities $1,000,000
Long-term liabilities 1,500,000
Total liabilities $2,500,000
Common stock $4,000,000
Retained earnings 750,000
Total
Required:
Note: Round answers to two decimal places.
1. Compute the times-interest-earned ratio.
fill in the blank 1
2. Compute the debt ratio.
fill in the blank 2
3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammatico’s industry are as follows:
Time-interest-earned 2.4, 5.4, 16.1
Debt 0.3, 0.8, 2.4
How does Grammatico compare with the industrial norms? Does it have too much debt?
The times-interest-earned ratio is very close to the lower quartile, which means that relative to most companies in the industry, Grammatico Company has a
expense burden (relative to its income). Its debt ratio is in the lower quartile, which means that the company
have additional credit. Because of its interest expense and income level, however, Grammatico should be very careful about taking on additional debt.
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