etirement

spread the
-he PROBLEMS
chargein
roblemwhen PROBLEM 7-1
RecurriBgrningBy
cludibgtere
ion)is EXpensaxExpensBquitparning
TinešntereEsrned andMinoriEyrnings
isclosure
in IntereEkpenspcluding
sers to make Capital
üdnterest
ncentration,
Earrings
beforeinterest
and tax:
recorded. Net sales 143
$1,079,
ligations Ccst of sales 792,755)
sheet.
Sellingand administration 264,566)
S 21,822
ruments
additional $21,822
TimesInterestEarned= = 5.06timesper
year
$4,311

b. Cash basis
timesinterest
earned:

$21,€22+ $40,000 $61,822

= 14.34 timesperyear
$4,311 $4,311

PROB-EM 7-2
RecurringEarningsExcludingInterest
Expense,Tax Expense,Equity Earnings,
a.Times Interest
E arned = and MinorityEarnings
InterestExpense, Including
CapitalizedInterest

Income beforeinconetaxes $675

Plus interest 60
$735
Adjustedincome
$ 60
Interestexpense

Earned = $735 = 12.25timesper year

Times Interest
$60

Spen:
cludiigtere
RecurriBgrningBx
dM i nority
TaxExpensqutarningsp
Earningsntere Rent ls
Pbrticnf a

b. geoverage
Fixedhar Intere£%pensepcludigpitalize
PbrtionfRentals
Interestintere

173
 PRO

$735
from (parta)
Adjustedincome leasepayments 50
1/3of operating S785
(1/3x $150) rentals
including
Adjustedincome, $ 60 b.D
expense 50
Interest
of operating leasepayments $110 R
C.
1/3

$785 = 7.14timesper year lota

Fixed ChargeCoverage $110 Tang

PROBLEM 7-3
d. Ke
Earnings, ExcludingInterest
Recurring
EquityEarning,
Expense,Tax Expense,
and MinorityEarnings
a.Times InterestEarned = InterestExpense, Including
W

CapitalizedInterest
RROB)
Income beforeincometaxes and
$36
charges
extraordinary
Plus interest 16
(1)Adjustedincome 52
(2) Interestexpense $16

Times InterestEarned: (1) dividedby (2) = 3.25 timesper year

RecurringEarnings,ExcludingInterest
Expense,Tax Expense,EquityEarnings,
and MinorityEarnings+ InterestPortion
b.Fixed ChargeCoverage= Rentals
0f
Expense, Including
Interest Capitalized
Interest+ InterestPortionof Rentals

Adjustedincome(parta) $ 52
1/3of operating leasepayments
(1/3.
(2) Adiusted incuue, @ing rentals
Interestexpense
1/3 of operating
S$16
leasepayments 20
(2) Adjustedinterest
expense $36
Fixed chargecoverage:(1)dividedby (2) = 2.00timesper Yg

174
 7-4
PROBLEM

TotalLiabilitse
$174,979
a.Debt Ratio= TotalASsets 41.21
$424,201

Ratio ie $174,979
TotalLiabilit
b. Debt/Equity Stockhol
des'Equity$249,222
70.21

C. Ratioof Total Debt to TangibleNet Worth =

Total Liabilities $174,979 = $174, 979 - 70.9%

Net Worth
Tangible $249,222- $2,324 $246,
898

d.KaufmanCompany has financed over 41% of itsassetsby the

use of funds from outside creditors.The
Debt/EquityRatio
and the Debt to Tangible Net Worth Ratioare
over 70%.
Whetherthese ratios are reasonable depends upon the
stability of earnings.

PROBLEM7-5
Ratio
Times Total Debt/
Interes Debt Debt/ Tangible
Iransaction t Rati Equity Net Worth
Earned

175
POBLEM 7-8 ExpenseTaxExpenseEquity
MinoritEarning
Earningsand
Earned Expensdncluding
a.Times Interest Interes
CapitaliteInteres

before
operations
from continuing
Earnings earnings
equity (1)$
incometaxes and 74,780,000
expense
(1) Add back interest (2) $_37,646,000
(2) Adjusted earnings $112,426,000

earned: [(2) dividedby (1)]1.99times

Times interest per year C.

operations
b.Earningsfrom continuing
Plus: $ 65,135,000
PR

(1)Interest 37,394,000
Income taxes a.
$i40,175,000
(2) Adjustedearnings
times
earned: [(2) dividedby (1)
) 3.72
Times interest per year

tines
givesa more conservative
C. Removingeguityearnings
interest earned ratio. The equityincomeisusually the
from
iallymore thanthe cash dividendreceived
substant
the firmgannot
depend on
related investments.Therefore,
thisincometo coverinterestpayments.

PROBLEM 7-9

ErningBxcludiigtere:
Recurri
Equitarning
ExpensaaxE xpens
a. 1. Times Interest
Earned = andMincritBarnings
p ensdncluding
InteresEbx
Capitalàenterest

$95,000 $170,000
= 9.5times = 5.3imes
$10,000 $32,000

2. Debt Ratio= TotalLiabilitise

$160,000 $575,000 = 58.4$
44.94
'
Shareholdes Equity $356,000 $985,000

3.Debt Equity
TotalLiabi
litis $160,000
81.6
$575,000 = 140.2
Shareholdes '
Equity $196,000
=
$410,000

184
 =
A. Debt toTangibleNet Worth
TotalLiabilitse $160,000
86.54
Shareholde'Equity $196,000
Intangibbe $11,000

$575,000 - 147.48
$410,000- $20,000
D00
No, Barker Companyhas a times interest
earned of 5.3 times
A6,000 whilethe industryaverage is7.2 times.This indicatesthat
000
Barker Companyhas lessthanaveragecoverageof its
es interest. Also,BarkerCompany has a much higherthan
average debt/equity, net worthratio.
and debt to tangible
year
C. AllenCompanyhas a earned,debt ratio,
bettertimesinterest
and debt to tangible
debt/equity, net worth.
00
PROBLEM 7-10
00
00
a.1.Times Interest
Earned =

mes
er year 2004: $280,000-$156,000 =7.29 times per year
$17,000
ve tines
ally
2003: $302,000- $152,000 =9.06 times per year
ed fronthe $16,000
on
depend 2002: = 8.80
$286,000 - $154,000 timesper year
$15,000
2001: $270,000 - $150,000 = 8.28 timesper year
$14,500
tere:
diig 2000: $248,000 - $147,000 = 4.39 timesper year
tparning
$23,000
ings
cluding
rest

58.44
00-
00

575000

185
 Excluding
RecurringEarnings, Equity
Tax Expense,
Interest,
Earnings,and MinorityEarnings
+

of Rentals
InterestPortion
2. Fixed Charge CoverageInterestExpense,Including
CapitalizedInterest+ Interest
Portionof Rentals

per
$156,000+ $10,000= 4.96 times
e

2004: $280, 000-

$17,000 + $10,
000

$157,000+ $9,000
= 6.16timesper year
2003: $302,000 -

$16,000+ $9,000

per vear
2002: $286,000- $154,000 + $9,500 = 5.78 times
$15,000+ $9,500

2001: $270,000 $150,000 + $10,

- 000 = 5.31timesper year
$14,500+ $10,000

2000: $248,000 - $147,000+ $9,000 = 3.44 timesper year

$23,000 + $9,000

3.Debt Ratio= Total Liabilities

Total Assets

2004: $88,000+ $170,000 = 46.07%

$560,000

2003: $89,500 + $168,000 = 46.48%

$554,000

2002: $90,500 + $165,000 = 46.14%

$553,800

2001: $90,000 + $164,000 - 46.31%

$548,500

2000: $91,500+ $262,000 = 65.83%

$537,000