Problem 16-44         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 equity	$4,750,000

 

Required:

Note: Round answers to two decimal places.

1.       Compute the times-interest-earned ratio.

2.       Compute the debt ratio.

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:

Times-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?