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Question
The financial statements of Flathead Lake Manufacturing Company are shown below.
| Income Statement 2017 | ||||
| Sales | $ | 9,300,000 | ||
| Cost of Goods Sold | 5,750,000 | |||
| Depreciation Expense | 550,000 | |||
| Gross Profit | $ | 3,000,000 | ||
| Selling and Administrative Expenses | 2,200,000 | |||
| EBIT | $ | 800,000 | ||
| Interest Expense | 200,000 | |||
| Income before Tax | $ | 600,000 | ||
| Taxes | 375,000 | |||
| Net Income | $ | 225,000 | ||
| Flathead Lake Manufacturing Comparative Balance Sheets | ||||||||
| 2017 | 2016 | |||||||
| Cash | $ | 50,000 | $ | 40,000 | ||||
| Accounts Receivable | 570,000 | 600,000 | ||||||
| Inventory | 530,000 | 460,000 | ||||||
| Total Current Assets | $ | 1,150,000 | $ | 1,100,000 | ||||
| Fixed Assets | 2,050,000 | 1,400,000 | ||||||
| Total Assets | $ | 3,200,000 | $ | 2,500,000 | ||||
| Accounts Payable | $ | 320,000 | $ | 300,000 | ||||
| Bank Loans | 480,000 | 400,000 | ||||||
| Total Current Liabilities | $ | 800,000 | $ | 700,000 | ||||
| Long-term Bonds | 1,500,000 | 1,000,000 | ||||||
| Total Liabilities | $ | 2,300,000 | $ | 1,700,000 | ||||
| Common Stock (200,000 shares) | 200,000 | 200,000 | ||||||
| Retainded Earnings | 700,000 | 600,000 | ||||||
| Total Equity | $ | 900,000 | $ | 800,000 | ||||
| Total Liabilities and Equity | $ | 3,200,000 | $ | 2,500,000 | ||||
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)
A) 1.5
B) 2
C) 2.5
D) 3
Answer
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