CHAPTER 7 — LONG-TERM LONG-TERM DEBT-PAYING ABILITY
MULTIPLE CHOICE
1. Jones Company has has long-term debt of $1,000,000, $1,000 ,000, while Smith Company, Jones' competitor, competit or, has longterm debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms? a. Smith Company's Company's times times interest interest earned earned should should be lower than than Jones. Jones. b. Jones obviously obviously has too much debt when when compared to its competitor. competitor. c. Jones should sell more more stock stock and use less less debt. debt. d. Smith has has five times better long-term borrowing ability ability than than Jones. Jones. e. Not enough enough information information to determine if if any of the answers are correct. correct. ANS: E 2. Ingram Dog Kennels had had the following financial statistics statistics for for 2008: Long-term debt (average rate of interest is 8%) Interest expense Net income Income tax Operating income
$400,000 35,000 48,000 46,000 107,000
What is the times interest earned for 2008? a. 11.4 times b. 3.3 times c. 3.1 times d. 3.7 times e. none of the answers are correct ANS: D 3. A times times interest earned ratio of 0.90 to 1 means: a. that the the firm will will default default on on its interest interest payment payment b. that net income is is less than the interest interest expense c. that the cash flow is less than the net net income income d. that the cash flow exceeds the net income e. none of the answers are correct ANS: B 4. Which of the following will not cause times interest earned to drop? Assume no other changes than those listed. a. An increase in bonds payable with no no change change in operating income. b. An increase in interest interest rates. c. A rise in preferred stock dividends. dividends. d. A rise in cost of goods sold with no change in interest expense. e. A drop in sales with with no change in interest expense. ANS: C
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5. A times interest earned ratio indicates that: a. preferred stock has no maturity date b. the debt will never never become due c. the firm will be able to repay the principal principa l when due due d. the principal can be refinanced e. none of the answers are correct ANS: E 6. Jordan Manufacturing reports the the following following capital capital structure: structure: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Premium on common stock Retained earnings
$100,000 400,000 10,000 80,000 100,000 180,000 170,000
What is the debt ratio? a. 0.48 b. 0.49 c. 0.93 d. 0.96 e. none of the answers are correct ANS: B 7. The debt ratio indicates: indicat es: a. the ability of the the firm firm to pay its its current current obligations obligations b. the efficiency of the use of total assets c. the magnification of earnings earnings caused by leverage leverage d. a comparison of liabilities liabiliti es with total assets e. none of the answers are correct ANS: D
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8. Joseph and John, Inc., had the following balance sheet results for 2008: (in millions) Current liabilities Bonds payable Lease obligations Minority interest Common stock Retained earnings
$12.6 18.6 2.7 1.4 8.6 22.9 $66.8
Compute the debt-equity ratio. a. 112.1% b. 87.6% c. 67.6% d. 46.7% e. none of the answers are correct ANS: A 9. Which of the following statements best compares long-term borrowing capacity ratios? a. The debt/equity ratio is more conservative than the debt ratio. b. The debt ratio is more conservative than the debt/equity ratio. c. The debt/equity ratio is more conservative than the debt to tangible net worth ratio. d. The debt to tangible net worth ratio is more conservative than the debt/equity ratio. e. The debt ratio is more conservative than the debt to tangible net worth ratio. ANS: D 10. In a. b. c. d. e.
computing debt to tangible net worth, which of the following is not subtracted in the denominator? copyrights goodwill patents investments trademarks
ANS: D 11. A fixed charge coverage: a. is a balance sheet indication of debt carrying ability b. is an income statement indication of debt carrying ability c. is a liquidity ratio d. frequently includes research and development e. computation is standard from firm to firm ANS: B
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12. The following financial statement data are taken from Xeron Company's 2008 annual report: (in millions) Current assets Investments Intangibles Tangible assets (net) Current liabilities Long-term debt Stockholders' equity
$12.6 9.4 6.8 58.1 6.4 39.7 40.8
Compute the debt ratio. a. 196.9% b. 113.0% c. 53.0% d. 45.7% e. none of the answers are correct ANS: C 13. The following financial statement data are taken from Xeron Company's 2008 annual report: (in millions) Current assets Investments Intangibles Tangible assets (net) Current liabilities Long-term debt Stockholders' equity
$12.6 9.4 6.8 58.1 6.4 39.7 40.8
Compute the debt to tangible net worth ratio. a. 146.8% b. 135.6% c. 53.0% d. 45.7% e. none of the answers are correct ANS: B 14. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements, then: a. the times interest earned ratio will be overstated, based upon the financial statements b. the fixed charge ratio will be overstated, based upon the financial statements c. the debt ratio will be understated d. the working capital will be understated e. none of the answers are correct ANS: C
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15. Under the Employee Retirement Income Security Act, a company can be liable for its pension plan up to: a. 30 percent of its total assets b. 30 percent of its net worth c. 40 percent of its total assets d. 40 percent of its net worth e. 50 percent of its total assets ANS: B 16. Included in the Employee Retirement Income Security Act are the following: a. provisions requiring minimum funding of pension plans b. minimum rights to employees upon termination of their employment c. creation of the Pension Benefit Guaranty Corporation d. provisions requiring minimum funding of pension plans and minimum rights to employees upon termination of their employment e. provisions requiring minimum funding of pension plans, minimum rights to employees upon termination of their employment, and creation of the P ension Benefit Guaranty Corporation ANS: E 17. What significant improvement in the financial reporting of pensions have pension accounting rules provided? a. determination of the expense for the income statement b. limited balance sheet recognition of pension liabilities c. improved disclosure d. determination of the expense for the income statement and limited balance sheet recognition of pension liabilities e. determination of the expense for the income statement, limited balance sheet recognition of pension liabilities, and improved disclosure ANS: E 18. There are a number of assumptions about future events that must be made regarding a defined benefit plan. An assumption that does not need to be made is: a. interest rates b. employee turnover c. mortality rates d. compensation e. how long the firm will continue ANS: E
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19. Which of the following statements is not correct? a. A ratio that indicates a firm's long-term, debt-paying ability from the income statement view is the times interest earned. b. Some of the items on the income statement that are excluded in order to compute times interest earned are interest expense, income taxes, and unusual or infrequent items. c. Capitalized interest should be included with interest expense when computing times interest earned. d. Usually, the highest times interest coverage in the most recent five-year period is used as the primary indication of the interest coverage. e. In the short run, a firm can often meet its interest obligations, even when the times interest earned is less than 1.00. ANS: D 20. Which of these items represents a definite commitment to pay out funds in the future? a. bonds payable b. reserves for rebuilding furnaces c. deferred taxes d. minority shareholders' interests e. redeemable preferred stock ANS: A 21. Which of the following statements is not true relating to a capitalized (capital) lease? a. A capital lease is handled as if the lessee bought the asset. b. The leased asset is in the fixed assets and the related obligation is included in liabilities. c. On the balance sheet, the capitalized asset amount will not usually agree with the capitalized liability amount because the liability is reduced by payments, and the asset is reduced by depreciation taken. d. Usually, a company depreciates capitalized leases faster than payments are made. e. On the balance sheet, the capitalized asset amount will usually be higher than the capitalized liability amount. ANS: E 22. Which of the following statements is not true relating to a defined contribution pension plan? a. A defined contribution plan defines the contributions of the company to the pension plan. b. Once the defined contribution is paid, the company has no further obligation to the pension plan. c. This type of plan shifts the risk to the employee as to whether the pension plan will grow to provide for a reasonable pension payment upon retirement. d. There is no problem estimating the company's pension expense. e. This type of plan presents substantial problems in estimating the pension liability. ANS: E 23. A number of assumptions about future events must be made regarding a defined benefit plan. Which of the following does not represent one of the assumptions? a. interest rates b. termination date for the firm c. employee turnover d. mortality rates e. compensation ANS: B
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TRUE/FALSE
1. When analyzing a firm's long-term, debt-paying ability, we only want to determine the firm's ability to pay the principal. ANS: F 2. In general, the profitability of a firm is not considered to be important in determining the short-term, debt-paying ability of the firm. ANS: T 3. A good times interest earned record would be indicated by a relatively high, stable coverage for the times interest earned coverage. ANS: T 4. Minority shareholders' interest in earnings of subsidiaries are included in earnings for the times interest earned coverage. ANS: T 5. Equity earnings are excluded from earnings for the times interest earned coverage. ANS: T 6. Capitalized interest should not be considered as part of interest in the times interest earned computation. ANS: F 7. To get a better indication of a firm's ability to cover interest payments in the long run, the noncash charges for depreciation, depletion, and amortization can be added back to the times interest earned ratio. ANS: F 8. When a portion of operating lease payments is included in fixed charges, it is an effort to recognize the true total interest that the firm is paying. ANS: T 9. Under generally accepted accounting principles, an item must clearly represent a commitment to pay out funds in the future in order to be classified as a liability. ANS: T 10. When a firm is expensing an item faster on the tax return than on the financial statements, a deferred tax liability is the result. ANS: T
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11. As with the debt ratio and the debt/equity ratio, from a long-term, debt-paying ability view, the lower the debt to tangible net worth ratio, the better. ANS: T 12. The debt to tangible net worth ratio is a more conservative ratio than the debt ratio. ANS: T 13. A joint venture can add significant potential liabilities to the parent company that are not on the face of the balance sheet. ANS: T 14. A potential significant liability is possible if the company withdraws from a multi-employer pension plan. ANS: T 15. A defined benefit plan shifts the risk to the employee as to whether the pension funds will grow to provide for a reasonable pension payment upon retirement. ANS: F 16. If an employee is in the pension plan, rights under this plan will be lost if the employee leaves the firm prior to receiving a vested interest. ANS: T 17. The balance sheet pension liability considers the projected benefit obligation. ANS: F 18. Some companies achieve benefits by hundreds of millions of dollars by a pension termination. ANS: T 19. Times interest earned indicates a firm's long-term, debt-paying ability from the balance sheet view. ANS: F 20. Capitalization of interest results in interest being added to a fixed asset instead of expensed. ANS: T
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21. In the short run, a firm can often meet its interest obligations even when the times interest earned is less than 1.00. ANS: T 22. The tax expense for the financial statements often agrees with the taxes payable. ANS: F 23. Some revenue and expense items never go on the tax return, but do go on the income statement. ANS: T 24. Repayment of a long-term bank loan would decrease the debt ratio. ANS: T 25. Increases of profits by cutting the cost of sales would increase the times interest earned. ANS: T PROBLEMS
1. Laura Bella Company reports the following statement of income: Operating Revenues
$4,800
Costs and Expenses: Cost of Sales Selling, Service, Administrative, and General Expense Income Before Interest Expense and Income Taxes Interest Expense Income Before Income Taxes Income Taxes Net Income
(2,000) (1,500) $1,300 (180) $1,120 (350) $
770
Note: Depreciation expense totals $300; preferred dividends total $60; operating lease payments total $180. Assume that 1/3 of operating lease payments is for interest. Required: a. Compute the times interest earned. b. Compute the fixed charge coverage.
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ANS: a. Recurring Earnings Before Interest Expense, Tax, Minority Income and Equity Earnings Interest Expense, Including Capitalized Interest
Times Interest Earned =
Income before income taxes Plus interest Adjusted income Interest expense
$1,120 180 $1,300 (A) $
180 (B)
(A) $1,300/(B) $180 = 7.22 times b.
Fixed Charge Coverage =
Recurring Earnings Before Interest Expense, Tax, Minority Income and Equity Earnings + Interest Portion of Rentals Interest Expense, Including Capitalized Interest + Interest Portion of Rentals
Income before income taxes Plus interest Adjusted income 1/3 of operating lease payments (1/3 $180)
$1,120 180 $1,300 60 $1,360
Interest expense 1/3 of operating lease payments
$180 60 $240
Fixed charge coverage =
$1,360 $240
= 5.67 times
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2. The following information is computed from Fast Food Chain’s annual report for 200 8.
Current assets Property and equipment, net Intangible assets, at cost less applicable amortization
Current liabilities Deferred federal income taxes Mortgage note payable Stockholders' equity
Net sales Cost of goods sold Selling and administrative expense Interest expense Income tax expense Net income
Note:
2008
2007
$ 2,731,020
$ 2,364,916
10,960,286
8,516,833
294,775
255,919
$13,986,081
$11,137,668
$ 3,168,123
$ 2,210,735
160,000
26,000
456,000
—
10,201,958
8,900,933
$13,986,081
$11,137,668
$33,410,599
$25,804,285
(30,168,715) (23,159,745) (2,000,000)
(1,500,000)
(216,936)
(39,456)
(400,000)
(300,000)
$
624,948
$
805,084
One-third of the operating lease rental charge was $100,000 in 2008 and $50,000 in 2007. Capitalized interest totaled $30,000 in 2008 and $20,000 in 2007.
Required: a. Based on the above data for both years, compute: 1. times interest earned 2. fixed charge 3. debt ratio 4. debt/equity ratio 5. debt to tangible net worth b. Comment on the firm's long-term borrowing ability based on the analysis.
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ANS: a. 1. Recurring Earnings Before Interest Expense, Tax, Minority Income and Equity Earnings Interest Expense, Including Capitalized Interest
Times Interest Earned =
2008 Net Sales Less Cost of Goods Sold Selling and Administrative (A)
$
Interest Expense Capitalized Interest Total Interest (B)
33,410,599
2007 $25,804,285
(30,168,715)
23,159,745)
(2,000,000)
(1,500,000)
$
1,241,884
$
216,936
$ 1,144,540 $
39,456
30,000 $
(A)/(B)
246,936 5.03 times
2. Fixed Charge Interest =
20,000 $
59,456
19.25 times
Recurring Earnings Before Interest Expense, Tax, Minority Earnings, Equity Earnings, Plus Interest Portion of Rentals Interest Expense, Including Capitalized Interest, Plus Interest Portion of Rentals 2008
2007
From Part (1) Interest Portion of Rentals (A)
$1,241,884
$1,144,540
100,000
50,000
$1,341,884
$1,194,540
From Part (1) Interest Portion of Rentals (B)
$
$
$
346,936 3.87 times
(A)/(B) 3. Debt Ratio =
246,936 100,000
Total Liabilities Total Assets $3,784,123 $13,986,081 27.1%
$2,236,735 $11,137,668 20.1%
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59,456 50,000
$
109,456
10.91 times
4. Debt/Equity Ratio =
Total Liabilities Stockholders' Equity $3,784,123 $10,201,958
$2,236,735 8,900,933
37.1% 5. Debt to Tangible Net Worth =
$3,784,123 $10,201,958 - $294,775
25.1%
Total Liabilities Stockholders' Equity - Intangibles = 38.2%
$2,236,735 $8,900,933 - $255,919
= 25.9%
b. In 2008, this firm had a substantial rise in debt. This included current liabilities, deferred taxes, and a new mortgage note payable. This increased debt and the related increased interest expense caused a decline in interest coverage and a rise in the debt, debt/equity, and debt to tangible net worth ratios. In addition, operating lease rental charges went up, which lowered the fixed charge coverage.
3. The following financial information is excerpted from the 2008 annual report of Retail Products, Inc. Balance Sheet (in thousands) 2008 2007 Current assets Investments Deferred charges Property, plant, and equipment, net Trademarks and leaseholds Excess of cost over fair market value of net assets acquired Assets held for disposal
$
Total liabilities Total stockholders' equity
449,195
$
433,049
32,822
55,072
4,905
12,769
350,921
403,128
45,031
47,004
272,146
276,639
6,062
10,247
$ 1,161,082
$1,237,908
$
$
689,535
721,149
471,547
516,759
$ 1,161,082
$1,237,908
$ 2,020,526
$1,841,738
Income Statement Net sales Cost of goods sold Selling and administrative Interest expense Net income (loss)
(2,018,436)
(1,787,126)
(300,000)
(250,000)
(40,000)
(30,000)
(337,910)
$ (225,388)
$
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Required: For each year compute: a. 1. Times interest earned 2. Debt ratio 3. Debt/equity ratio 4. Debt to tangible net worth ratio b. Comment on the results. c. Does a times interest earned ratio of less than 1 to 1 mean that the firm cannot pay its interest expense? ANS: a. Recurring Earnings Before Interest, Tax, Minority Income and Equity Earnings Interest Expense, Including Capitalized Interest
1. Times Interest Earned =
2008 $2,020,526 - $2,018,436 - $300,000 $40,000 Negative 7.45 Times 2007 $1,841,738 - $1,787,126 - $250,000 $30,000 Negative 6.51 Times
2. Debt Ratio =
Total Liabilities Total Assets
2008 $689,535 $1,161,082 59.4%
3.
Debt/Equity Ratio =
2008 $689,535 $471,547 146.2%
2007 $721,149 $1,237,908 58.3%
Total Liabilities Total Stockholders' Equity 2007 $721,149 $516,759 139.6%
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4.
Debt to Tangible Net worth Ratio
=
Total Liabilities Total Stockholders' Equity - Intangible Assets
2008 $689,535 $471,547 - $45,031 - $272,146
= 446.7%
$721,149 $516,759 - $47,004 - $276,639
= 373.4%
2007
b. This firm has had a rise in the debt, debt/equity, and debt to tangible net worth ratios. The debt to tangible net worth is especially high due to the high amount of excess of cost over fair market value of net assets. The times interest earned figure dropped from a negative 6.51 times in 2007 to a negative 7.45 times in 2008. This firm's long-term borrowing ability appears to be very negative and deteriorated further in 2008. c.
No, a times interest earned ratio of less than 1 to 1 does not mean, in the short run, that the firm cannot meet its interest payments. Some of the expenses, such as depreciation, do not require current funds, but they do reduce the interest coverage. Also, in the short run, the outlay can come from sources of funds other than income.
4. Mr. Jones has asked you to advise him of the long-term debt position of Dryden Corporation. He provides you with the ratios indicated below.
Fixed Charge Coverage Times Interest Earned Debt Ratio Debt to Tangible Net Worth
2006
2007
2008
6.3
4.5
5.0
8.2
6.0
5.3
40%
39%
40%
80%
81%
84%
Required: Give the implications and limitations of each item separately and then the collective inference one may draw about Dryden's long-term, debt-paying ability.
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ANS: Times interest earned has declined. This can be caused by lower income, higher debt, or a combination of both. Fixed charge coverage has declined. The decline for this ratio has been less than the decline in the times interest earned. This indicates that the use of noncapitalized leases has declined. The debt ratio is relatively stable. The debt to tangible net worth ratio has increased slightly. This can be caused by higher debt, lower equity, or higher intangibles. Since the debt ratio is relatively constant, the problem does not appear to be higher debt. Rather, higher interest rates or lower income appear to be the problem. Since the debt ratio is constant, the most logical explanation for the rise in debt to tangible net worth is a rise in intangibles, which lowers the denominator. The long-term debt position has declined, but we need more information about the company and industry in order to come to a conclusion on the long-term debt position.
5. Amsterdam Antiques reported the following comparative income figures in 2008. (in thousands) 2008 2007 Net sales Other income Costs and expenses: Cost of goods sold Selling and general expenses Interest Income before income taxes and extraordinary items Income taxes Income before extraordinary items Extraordinary items — losses from fire Net income
$701
$646
10
8
$711
$654
$472
$408
176
156
28
22
$676
$586
$ 35
$ 68
(15)
(30)
$ 20
$ 38
$ 20
$ 20
18
Your boss, the president of Amsterdam bank, is concerned about Amsterdam's borrowing capacity. A representative of Amsterdam Antiques feels that there should be no problem, since net income are the same with slightly higher sales. Required: Compute times interest earned and comment on the bank's position.
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ANS:
Times Interest Earned =
Recurring Earnings Before Interest, Tax, Minority Income and Equity Earnings Interest Expense, Including Capitalized Interest
2008
2007
Income before income taxes and extraordinary items Plus interest expense (a)
$ 35
$ 68
28
22
$ 63
$ 90
(b) Interest expense
$ 28
$ 22
2.25 times
4.09 times
(a) ÷ (b)
The ability of the firm to cover its interest has declined substantially due both to rising interest and falling income. The statement by the Amsterdam Antiques representative is false. The only reason that net income was at $20,000 in 2007 was because of the extraordinary fire loss. Recurring profits dropped from $38,000 to $20,000.
6. Required: Following is a list of paired ratios and transactions. For each transaction, indicate the effect of that transaction on the specific ratio. Use + for increase, - for decrease, and 0 for no effect.
a. b. c. d. e.
Transaction A firm is required to capitalize leases previously presented only in notes. A firm sells its own common stock. A firm has an increase in selling expense with no change in other expenses. A firm writes off a sizeable account receivable. A firm pays cash for a valuable patent.
ANS: a. b. c. d. e.
+ 0 +
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Ratio Debt Ratio of 0.4 Debt/Equity Ratio of 1.12 Times Interest Earned Ratio of 6.2 to 1 Times Interest Earned Ratio of 3.6 to 1 Debt to Tangible Net Worth Ratio of 1.3 to 1
7. Aristocrats Art reported the following trend analysis to its bank as an attachment to a loan application.
Fixed Charge Ratio Times Interest Earned Ratio Debt Ratio Debt to Tangible Net Worth Ratio
2008
2007
2006
4.00
2.50
1.54
4.94
3.17
2.08
0.47
0.51
0.56
0.91
1.06
1.36
You have been asked to evaluate the long-term borrowing capacity. You know that a rule of thumb for this industry for the debt/ equity ratio is 1 to 1. Required: a. Compute the debt/equity ratio for 2008, 2007, and 2006, using the debt ratio as a guide. b. Comment on the long-term borrowing ability of this firm. ANS: a.
If total liabilities are .47 of total assets, then total stockholders' equity must be .53, since total liabilities plus total stockholders' equity = total assets.
Debt = Equity
0.47 0.53
= .89 (2008)
0.51 0.49
= 1.04 (2007)
0.56 0.44
= 1.27 (2006)
b. This firm shows evidence of an improved, long-term borrowing capacity position. The times interest earned ratio and the fixed charge ratio has improved, as has the debt ratio, debt to tangible net worth ratio, and debt/equity ratio. The debt/equity ratio is now below the industry average.
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8. You have been asked to evaluate the long-term borrowing position of Client, Inc. However, you were given only the following limited information. Bonds payable, 12% Stockholders' equity Current assets Tangible assets, net Intangible assets Investments Other assets Sales Operating expenses
$1,000,000 1,800,000 1,870,000 1,600,000 40,000 120,000 90,000 4,000,000 3,620,000
Required: Assuming that this is the only information you will receive, estimate the following ratios: a. Times interest earned ratio b. Debt ratio c. Debt/equity ratio d. Debt to tangible net worth ratio ANS: Computations for figures needed in the ratios follow. Total assets: Current assets Tangible assets Intangible assets Investments Other assets Total assets
$1,870,000 1,600,000 40,000 120,000 90,000 $3,720,000
Liabilities: Total assets Less stockholders' equity Total liabilities
$3,720,000 1,800,000 $1,920,000
Interest: $1,000,000 0.12 = $120,000
a.
Times Interest Earned Ratio
=
Recurring Earnings Before Interest, Tax Minority Income and Equity Earnings Interest Expense, Including Capitalized Interest
= $4,000,000 - $3,620,000 = 3.17 $120,000 times
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b. Debt Ratio
=
=
c.
Debt/Equity Ratio
=
=
d. Debt to Tangible Net Worth Ratio
=
=
Total Liabilities Total Assets $1,920,000 $3,720,000
= 51.6%
Total Liabilities Shareholder' Equity $1,920,000 $1,800,000
= 106.7%
Total Liabilities Shareholders' Equity - Intangible Assets $1,920,000 = 109.1% $1,800,000 - $40,000
9. Required: Indicate the effect of each of the following transactions on the ratios listed. Use + to indicate an increase, - to indicate a decrease, and 0 to indicate no effect. Assume an initial times interest earned ratio of 3 to 1, debt ratio of 0.5 to 1, debt/equity ratio of 1.0 to 1, and total debt to tangible net worth ratio of 1.1 to 1. Times Interest Debt Earned Ratio Ratio
Transaction a. Collection of accounts receivable. b. Firm has decreasing profits due to rising cost of sales. c. Firm appropriates a substantial amount for expansion. d. Conversion of preferred stock to common. e. Repayment of a short-term bank loan (ignore interest). f. Payment for a valuable trademark. g. The stock is split two for one. h. Purchase of equipment financed by a long-term note (consider interest). i. Conversion of bonds to stock. . Declaration and payment of dividend. k. The firm experiences a rise in the rate charged on its line of credit.
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Debt Total Debt Equity Tangible Net Ratio Worth Ratio
ANS: Times Interest Debt Earned Ratio Ratio
Transaction a. Collection of accounts receivable. b. Firm has decreasing profits due to rising cost of sales. c. Firm appropriates a substantial amount for expansion. d. Conversion of preferred stock to common. e. Repayment of a short-term bank loan (ignore interest). f. Payment for a valuable trademark. g. The stock is split two for one. h. Purchase of equipment financed by a long-term note (consider interest). i. Conversion of bonds to stock. . Declaration and payment of dividend. k. The firm experiences a rise in the rate charged on its line of credit.
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Debt Total Debt Equity Tangible Net Ratio Worth Ratio
0 -
0 -
0 -
0 -
0
0
0
0
0 0
0 -
0 -
0 -
0 0 -
0 0 +
0 0 +
+ 0 +
+ 0 -
+ +
+ +
+ +
10. Listed below are several ratios. a. b. c. d. e.
times interest earned fixed charge coverage debt ratio debt/equity ratio debt to tangible net worth
Required: Match the letter that goes with each formula. _____ 1.
_____ 2.
Total Liabilities Shareholders' Equity - Intangible Assets Total Liabilities Total Assets
_____ 3.
Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Expense Interest Expense, Including Capitalized Interest
_____ 4.
Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earnings + Interest Portion of Rentals Interest Expense, including Capitalized Interest + Interest Portion of Rentals
_____ 5.
Total Liabilities Shareholders' Equity
ANS: 1. 2. 3. 4. 5.
e c a b d
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