Green Penguin Pencil 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 $2.50 million on which it pays a 11% 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 Green Penguin Pencil's debt management ratios? The U. S. tax structure influences a firm's willingness to finance with debt. The tax structure debt.

Solution :

a). Asset turnover ratio = total sales / total asset   = 3.50

     Total asset         =   40 million / 3.5      =   1142857

     Total debt          =  2.50 million

Therefore, the debt ratio =

                                         = 2.18

b). Time interest earned ratio = EBIT/Interest

  EBIT = net sales - operating expense

           = 40,000,000 - 18,000,000

           = $ 22,000,000

Interest expense  = 10 % x 2,500,000

                              =  $ 250,000

Times interest earned ratio = EBIT/ interest expense

                                              =

                                               = 88 times

c). Total equity = total asset - total debt

                         =  400,000,000 - 2,500,000

                         = 397,500,000

   Money raised from the creditor for each dollar of equity

                         = 2,500,000/397,500,000

                         = 6%

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