Calculate the debt and coverage ratios for the two companies

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Reference no: EM131625258

Pelican? Paper, Inc., and Timberland? Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow.

Use them in a ratio analysis that compares the? firms' financial leverage and profitability.

Item Pelican Paper, Inc. Timberland Forest, Inc.

Total assets $10,100,000 $10,100,000

Total equity (all common) 8,800,000 5,300,000

Total debt 1,300,000 4,800,000

Annual interest 130,000 480,000

Total sales 26,000,000 26,000,000

EBIT 6,500,000 6,500,000

Earnings available for

common stockholders 3,837,600 3,588,000

a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other.

?(1) Debt ratio

?(2) Times interest earned ratio

b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.

?(1) Operating profit margin

?(2) Net profit margin

?(3) Return on total assets

?(4) Return on common equity

c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican? Paper? What are the risks that? Timberland's investors undertake when they choose to purchase its stock instead of? Pelican's?

Reference no: EM131625258

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