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Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statements for the 2 most recent years. Refer to the information for Kepler Company on the previous page. Required: Note : Round all answers to two decimal places. 1. Compute the following for each year: (a) the times-interest-earned ratio and (b) the debt ratio 2. CONCEPTUAL CONNECTION Does Kepler have too much debt? What other information would help in answering this question?

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773
Chapter 15, Problem 62P
Textbook Problem
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Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statements for the 2 most recent years.

Chapter 15, Problem 62P, Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture , example  1

Chapter 15, Problem 62P, Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture , example  2

Refer to the information for Kepler Company on the previous page.

Required:

Note: Round all answers to two decimal places.

  1. 1. Compute the following for each year: (a) the times-interest-earned ratio and (b) the debt ratio
  2. 2. CONCEPTUAL CONNECTION Does Kepler have too much debt? What other information would help in answering this question?

1.

To determine

Calculate times interest earned ratio and debt ratio.

Explanation of Solution

Times-Interest-Earned Ratio:

Times-interest-earned ratio is a leverage ratio that determines the firm’s ability to pay its debt by assessing the income statement of the firm. It is calculated by the addition of income before tax and interest expense and dividing the summation amount by interest expense.

Debt Ratio:

Debt ratio is a leverage ratio that evaluates the proportion of total liabilities to total assets. The ratio measures the extent to which creditors are protected for insolvency.

(a)

Use the following formula to calculate the value of times-interest-earned ratio of this year:

Times-Interest-Earned Ratio=Income before Tax+Interest ExpenseInterest Expense

Substitute $163,000 for income before tax and $12,000 for interest expense in the above formula.

Times-Interest-Earned Ratio=$163,000+$12,000$12,000=14.58 times

Therefore, the value of times-interest-earned ratio for this year is 14.58 times.

Use the following formula to calculate the value of times-interest-earned ratio of last year:

Times-Interest-Earned Ratio=Income before Tax+Interest ExpenseInterest Expense

Substitute $132,000 for income before tax and $18,000 for interest expense in the above formula.

Times-Interest-Earned Ratio=$132,000+$18,000$18,000=8

2.

To determine

Identify whether Company KE have too much debt. Also, identify the other needed information to explain if company KE has too much debt.

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