Answer:
(1) Debt Ratio in 2017 = 44.57%; Debt Ratio in 2016 = 39.33%; Equity Ratio in 2017 = 55.43%; and Equity Ratio in 2016 = 60.67%.
(2) Debt-To-Equity Ratio in 2017 = 80.42%; and Debt-To-Equity Ratio in 2016 = 64.83%.
(3) Times Interest Earned in 2017 = 4.71 times; and Times Interest Earned in 2016 = 4.22 times.
Explanation:
(1) Calculation of debt and equity ratios
Debt ratio is a ratio that is used to measure the ability of a company to pay off its liabilities with its assets. Debt ratio can be calculated using the following formula:
Debt Ratio = Total Debt / Total Assets
We can then calculate as follows:
Total debt = Accounts payable + Long-term notes payable secured by mortgages on plant assets
Total debt in 2017 = $159,605 + $120,505 = $280,110
Total debt in 2016 = $89,723 + $123,354 = $213,077
Total assets in 2017 = $628,417
Total assets in 2016 = $541,739
Debt Ratio in 2017 = $280,110 / $628,417 = 0.4457, or 44.57%
Debt Ratio in 2016 = $213,077 / $541,739 = 0.3933, or 39.33%
Equity ratio is a ratio that is used to measure the amount of assets of a company that are financed by the investments of the owners of the company. Equity ratio can be calculated using the following formula:
Equity Ratio = Total Equity / Total Assets
We can then calculate as follows:
Total equity = Common stock, $10 par value + Retained earnings
Total equity in 2017 = $162,500 + $185,807 = $348,307
Total equity in 2016 = $162,500 + $166,162 = $328,662
Equity Ratio in 2017 = 0.5543, or 55.43%
Equity Ratio in 2016 = 0.6067, or 60.67%
(2) Calculation of debt-to-equity ratio.
The debt-equity ratio provides the proportion of financing of a company that is contributed by creditors and investors. Debt-equity ratio can be calculated using the following formula:
Debt-To-Equity Ratio = Total Debt / Total Equity
Using the data in part (1) above, we can then calculate as follows:
Debt-To-Equity Ratio in 2017 = $280,110 / $348,307 = 0.8042, or 80.42%
Debt-To-Equity Ratio in 2016 = $213,077 / $328,662 = 0.6483, or 64.83%
(3) Calculation of times interest earned
The times interest earned ratio is a ratio that is used to determine the proportionate amount of income that that is required to cover interest expenses. The times interest earned ratio can be calculated using the following formula:
Times Interest Earned = Earnings before interest and tax (EBIT) / Interest expenses
We can then calculate as follows:
EBIT = Sales - Cost of goods sold - Other operating expenses
EBIT in 2017 = $816,942 - $498,335 - $253,252 = $65,355
EBIT in 2016 = $644,669 - $419,035 - $163,101 = $62,533
Interest expenses in 2017 = $13,888
Interest expenses in 2016 = $14,827
Times Interest Earned in 2017 = $65,355 / $13,888 = 4.71 times
Times Interest Earned in 2016 = $62,533 / $14,827 = 4.22 times
