"21. Neeley Office Supplies income statement is given below. a. What is the times interest earned ratio? b. What would be the fixed charge coverage ratio?NEELEY OFFICE SUPPLIESSales .............................................................................. $200,000Cost of goods sold ......................................................... 115,000Gross profit ................................................................... 85,000Fixed charges (other than interest) ................................25,000Income before interest and taxes ................................... 60,000Interest...........................................................................15,000Income before taxes ...................................................... 45,000Taxes .............................................................................15,300Income after taxes ......................................................... $ 29,7003-21. Solution:Neeley Office SuppliesIncome before interest and taxes a.Times interested earned = Interest $60,000 =15,000 = 4x Income before fixed charges and taxes b. Fixed charge coverage = Fixed charges $60,000 + 25,000 = $15,000 + 25,000 $85,000 = $40,000 = 2.125x S3-30 22. Using the income statement for Times Mirror and Glass Co., compute the following ratios: a. The interest coverage. b. The fixed charge coverage.The total assets for this company equal $80,000. Set up the equation for the Du Pontsystem of ratio analysis, and compute c, d, and e. c. Profit margin. d. Total asset turnover. e. Return on assets (investment).TIMES MIRROR AND GLASS COMPANYSales .............................................................................. $126,000 Less: Cost of goods sold ......................................... 93,000Gross profit ................................................................... $33,000 Less: Selling and administrative expense ............... 11,000 Less: Lease expense ................................................4,000Operating profit* ........................................................... $ 18,000 Less: Interest expense .............................................3,000Earnings before taxes .................................................... $ 15,000 Less: Taxes (30%)...................................................4,500Earnings after taxes ....................................................... $ 10,500*Equals income before interest and taxes.3-22. Solution:Times Mirror and Glass Co.Income before interest and taxes a.Times interest earned = Interest $18,000 =$3,000 = 6x S3-31 3-22. (Continued) Income before fixed charges and taxes b. Fixed charge coverage = Fixed charges $18,000 + 4,000 = $3,000 + $4,000 $22,000 = $7,000 = 3.14x Net Income c. Profit Margin = Sales $10,500 =$126,000 = 8.33% Sales Total asset turnover = d.Total assets $126,000 =$80,000 =1.575x Net income Sales Return on assets (investments) = × e.Sales Total assets = 8.33% ×1.575x =13.12% S3-32 23. A firm has net income before interest and taxes of $120,000 and interest expense of$24,000. a. What is the times interest earned ratio? b. If the firm ?s lease payments are $ 3-23. Solution:Income before interest and taxes Times interest earned = a.Interest =120,000/$24,000= 5x IBIT + Before tax fixed charges Fixed charge converage = b.Interest + Fixed charges $120,000 + $40,000 =$24,000 + $40,000 = 2.5x S3-33 24. In January 1999, the Status Quo Company was formed. Total assets were $500,000, ofwhich $300,000 consisted of depreciable fixed assets. Status Quo uses straight-linedepreciation, and in 1999 it estimated its fixed assets to have useful lives of 10 years.Aftertax income has been $26,000 per year each of the last 10 years. Other assets have notchanged since 1999. a. Compute return on assets at year-end for 1999, 2001, 2004, 2006, and 2008. (Use $26,000 in the numerator for each year.) b. To what do you attribute the phenomenon shown in part a? c. Now assume income increased by 10 percent each year. What effect would this haveon your above answers? Merely comment.3-24. Solution:Status Quo Companya. Return on assets (investment) = Income after taxes/Totalassets.The return on assets for Status Quo will increase over time asthe assets depreciate and the denominator gets smaller. Fixedassets at the beginning of 1995 equal $300,000 with a ten-yearlife which means the depreciation expense will be $30,000per year. Book values at year-end are as follows:1999 = $270,000;2001 = $210,000;2004 = $120,000;2006 = $60,000;2008 = -0-Income after taxes Return on assets (investment) =Current assets + Fixed assets 1999 = $26,000/$470,000 = 5.53%2001 = $26,000/$410,000 = 6.34%2004 = $26,000/$320,000 = 8.13%2006 = $26,000/$260,000 = 10.00%2008 = $26,000/$200,000 = 13.00%S3-34 "