To analyze a company’s financial leverage situation, you need to measure the firm’s debt management ratios. Based on the preceding information, what are the values for Blue Sky Drone’s debt management ratios? Ratio Value Debt ratio Times-interest-earned ratio

Debt Ratio =15.31%, Times-interest-earned ratio =179.5x

Explanation:

The correct question should come with a preceding information which is as follows

Blue Sky Drone Company has a total asset turnover ratio of 3.50x, net annual sales of $40 million, and operating expenses of $18 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 7% interest rate.

To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Blue Sky Drone's debt management ratios?

SOLUTION

values for Blue Sky Drone's debt management ratios is the debt ratio and Times-interest-earned ratio

Given from the information

total debt = $1.75 million

net annual sales = $40 million

total asset turnover ratio = 3.50x

operating expenses = $18 million

interest rate =7% = 0.07

There to calculate the Debt Ratio:

total debt/(net annual sales / total asset turnover ratio)

$1.75 million/($40 million/3.50x) = .1531

=15.31%

To calculate the Times-interest-earned ratio

(net annual sales - operating expenses) ÷ (total debt × interest rate)

$40 million - $18 million = $22 million

$1.75 million x .07 = $122,500

$22 million/$122,500

= 179.59x