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
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?
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