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Computation of Financial Ratios for Long-term Creditors

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Comparative financial statements for Heritage Antiquing Services for the fiscal year ending December 31 appear on the following page. The company did not issue any new common or preferred stock during the year. A total of 500 thousand shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $.75. The market value of common stock at the end of the year was $21. All sales are on account.

Compute the following financial ratios for long-term creditors for this year:

1. Times interest earned ratio.

2. Debt-to-equity ratio.

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Solution Summary

The attached MS Excel spreadsheet contains detailed instructions for the calculation of times interest earned and debt-to-equity ratios for the Heritage Antiquing Services exercise.