Chapter 10, Problem 13ME

Computing the Debt-to-Assets Ratio and the Times Interest Earned Ratio

The balance sheet for Shaver Corporation reported the following: cash, $5,000; short-term investments, $10,000; net accounts receivable, $35,000; inventory, $40,000; prepaids, $10,000; equipment, $100,000; current liabilities, $40,000; notes payable (long-term). $70,000; total stockholders’ equity, $90,000; net income, $3,320; interest expense, $4,400; income before income taxes, $5,280. Compute Shaver’s debt-to-assets ratio and times interest earned ratio. Based on these ratios, does it appear Shaver relies mainly on debt or equity to finance its assets? Is it probable that Shaver will be able to meet its future interest obligations?