Question

​Doug's Boat​ Shop, Inc. reports operating income of​ $260,000 and interest expense of​ $31,200. The average common​ stockholders' equity during the year was​ $50,000. The beginning assets balance is​ $115,000 and ending assets balance is​ $180,000. What is the leverage​ ratio? (Round your final answer to two decimal​ places.)

Answer 1

Answer:

1.  Interest coverage ratio=8.33

2. debt stockholder ratio=0.624

3. debt ratio=0.21

Explanation:

Leverage ratio is a financial tool used to determine a company's level of debt and it's ability to handle debt without going bankrupt.

1. Consider the interest coverage ratio formula;

interest coverage ratio=operating income/interest expense

where;

operating income=$260,000

interest expense= $31,200

replacing;

interest coverage ratio=260,000/31,200=8.33

2. Consider the debt to equity ratio formula;

debt to equity ratio=debt/stockholder equity

where;

debt=interest expense=$31,200

stockholder equity= $50,000

replacing;

debt stockholder ratio=31,200/50,000=0.624

3. Consider the debt ratio formula;

debt ratio=debt/assets

where;

debt=interest expense=$31,200

average assets=(beginning asset balance+ending asset balance)/2

average assets=(115,000+180,000)/2=$147,500

replacing;

debt ratio=31,200/147,500=0.21