Question

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.
Current liabilities $ 197
Income before interest and taxes $ 116
10% Bonds, long-term 370
Interest expense 37
Total liabilities 567
Income before tax 79
Shareholders' equity
Income tax 22
Capital stock 210
Net income $ 57
Retained earnings 291
Total shareholders' equity 501
Total liabilities and equity $1,068
HHF's times interest earned ratio is (Round your answer to two decimal places.):
a. 10.00.
b. 3.14.
c. 1.54.
d. 2.14.
Current liabilities $ 180
Income before interest and taxes $ 118
10% Bonds, long-term 360
Interest expense 36
Total liabilities 540
Income before tax 82
Shareholders' equity
Income tax 20
Capital stock 201
Net income $ 62
Retained earnings 283
Total shareholders' equity 484
Total liabilities and equity $1,024
HHF's debt to equity ratio is:_____________. (Round your answer to two decimal places.):
a. 0.74.
b. 0.56.
c. 1.12.
d. 1.90.

Answer 1

Answer:

1. B. 3.14

2. C. 1.12

Explanation:

1. Times Interest Earned ratio

Measures how well a company is able to cover it's debt obligations using it's earnings.

The formula is simply,

= Earning before Interest and Tax / Interest Expense

Therefore,

Times Interest Earned ratio = 116/37

= 3.14

HHF's times interest earned ratio is Option B, 3.14.

2. Debt to Equity Ratio

This ratio compares the debt used to fund a company vs it's equity. It measures how much of either way used to fund the company.

The formula is,

= Total Debt / Total Equity

= 540/484

= 1.12

HHF's Debt to Equity ratio is 1.12, Option C.