The Allen Company and the Barker Company are competitors in the same industry.
Selected financial data from their 2001 statements are shown below.
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Balance Sheet December 31, 2001 |
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|
Allen |
Barker |
|
|
Company |
Company |
|
|
Cash |
$ 10,000 |
$ 35,000 |
|
Accounts receivable |
45,000 |
120,000 |
|
Inventory |
70,000 |
190,000 |
|
Investments |
40,000 |
100,000 |
|
Intangibles |
11,000 |
20,000 |
|
Property, plant, and equipment |
180,000 |
520,000 |
|
Total assets |
$356,000 |
$985,000 |
|
Accounts payable |
$ 60,000 |
$165,000 |
|
Bonds payable |
100,000 |
410,000 |
|
Preferred stock, $1 par |
50,000 |
30,000 |
|
Common Stock, $10 par |
100,000 |
280,000 |
|
Retained earnings |
46,000 |
100,000 |
|
Total liabilities and capital |
$356,000 |
$985,000 |
|
Income Statement For the Year Ended December 31, 2001 |
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|
Allen Company |
Barker Company |
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|
Sales |
$1,050,000 |
$2,800,000 |
|
|
Cost of goods sold |
725,000 |
2,050,000 |
|
|
Selling and administrative expenses |
230,000 |
580,000 |
|
|
Interest expense |
10,000 |
32,000 |
|
|
Income taxes |
42,000 |
65,000 |
|
|
Net income |
$ 43,000 |
$ 73,000 |
|
|
Industry Averages: |
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|
Times interest earned |
7.2 times |
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|
Debt ratio |
40.3% |
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|
Debt/equity |
66.6% |
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|
Debt to tangible net worth |
72.7% |
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Required a. Compute the following ratios for each company:
1. Times interest earned 3. Debt/equity ratio
2. Debt ratio 4. Debt to tangible net worth
b. Is Barker Company in a position to take on additional long-term debt? Explain.
c. Which company has the better long-term debt position? Explain.