11.4Calculate financial leverage measures The following information was available for the year ended December 31, 2016:Earnings before interest and taxes (operating income)$120,000Interest expense 20,000Income tax expense 30,000Net income   70,000Total assets at year-end 400,000Total liabilities at year-end 240,000Required:Calculate the debt ratio at December 31, 2016.Calculate the debt/equity ratio at December 31, 2016.Calculate the times interest earned for the year ended December 31, 2016.

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Asked Aug 1, 2019
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11.4
Calculate financial leverage measures The following information was available for the year ended December 31, 2016:
Earnings before interest and taxes (operating income)
$120,000
Interest expense 20,000
Income tax expense 30,000
Net income   70,000
Total assets at year-end 400,000
Total liabilities at year-end 240,000
Required:
Calculate the debt ratio at December 31, 2016.
Calculate the debt/equity ratio at December 31, 2016.
Calculate the times interest earned for the year ended December 31, 2016.

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Expert Answer

Step 1

Calculate the debt ratio.

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Debt ratio = Total liabilities Total assets $240.000 $400,000 0.6

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Step 2

Calculate the debt to equity ratio:

Step 1: Calculate the amount of shareholder’s equity.

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Total shareholders' equity Total assets - Total liabilities = $400.000-$240.000 = $160,000

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Step 3

Step 2: Calculate the debt to equ...

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Total liabilities Debt equity ratio= Total sharholders' equity $240,000 $160.000 1.5

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