Asked by Hannah Baranda on May 29, 2024
Verified
Fraction Corporation has provided the following financial data: Required:
a.What is the company's times interest earned ratio for Year 2?
b.What is the company's debt-to-equity ratio at the end of Year 2?
c.What is the company's equity multiplier at the end of Year 2?
Debt-to-equity Ratio
The debt-to-equity ratio is a financial leverage indicator that compares a company's total liabilities to its shareholder equity.
Times Interest
This refers to the times interest earned (TIE) ratio, a financial metric used to measure a company's ability to meet its debt obligations with its earnings before interest and taxes (EBIT).
Equity Multiplier
A financial leverage ratio that measures the portion of a company's assets that is financed by stockholders' equity.
- Evaluate a corporation's leverage and potential financial risks using metrics such as the debt-to-equity ratio, equity multiplier, and times interest earned ratio.
Verified Answer
= $38,571 ÷ $10,000 = 3.86 (rounded)
b.Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $310,000 ÷ $1,137,000 = 0.27 (rounded)
c.Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,438,500 ÷ $1,128,500 = 1.27 (rounded)
*Average total assets = ($1,447,000 + $1,430,000)÷ 2 = $1,438,500
**Average stockholders' equity = ($1,137,000 + $1,120,000)÷ 2 = $1,128,500
Learning Objectives
- Evaluate a corporation's leverage and potential financial risks using metrics such as the debt-to-equity ratio, equity multiplier, and times interest earned ratio.
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