Review of solvency ratios



Q45. Review of solvency ratios
Calculate the following solvency ratios based on the information below:
(1) Debt to equity ratio
(2) Debt to assets ratio
(3) Long-term debt to assets ratio
(4) Times interest earned ratio
(5) Assets to equity ratio

Current liabilities = $300,000
Long-term liabilities = $1,500,000
Total liabilities = $1,800,000
Total stockholders’ equity = $1,200,000
Total assets = $3,000,000
Average stockholders’ equity = $1,100,000
Average total assets = $2,750,000

Net income = $350,000
Interest expense = $50,000
Tax expense = $125,000
Earnings before interest and taxes (EBIT) = $525,000

A45.
(1) Debt to equity ratio
= Total liabilities / Total stockholders’ equity
= $1,800,000 / $1,200,000 = 1.5

(2) Debt to assets ratio
= Total liabilities / Total assets
= $1,800,000 / $3,000,000 = 0.6

(3) Long-term debt to assets ratio
= Long-term liabilities / Total assets
= $1,500,000 / $3,000,000 = 0.5

(4) Times interest earned ratio
= Earnings before interest and taxes (EBIT) / Interest expense
= (Net income + Interest expense + Tax expense) / Interest expense
= ($350,000 + $50,000 + $125,000) / $50,000
= $525,000 / $50,000 = 10.5

(5) Assets to equity ratio
= Average total assets / Average stockholders’ equity
= $2,750,000 / $1,100,000 = 2.5

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