1.3 Solvency

Question 1

Solvency

Answer 1

Ability to pay non-current obligations

Question 2

Total debt to total capital ratio

Answer 2

Total debt/
Total capital

Capital is made up of debt plus equity

When the ratio is low, it means stockholders are providing more of the firms capital. Lower risk

Question 3

Debt to equity ratio

Answer 3

Total debt/
Total equity

Reflects long-term debt payment ability

Lower ratio means lower relative that burden

Question 4

Long-term debt to equity ratio

Answer 4

Long-term debt/
Stockholders equity

Lower ratio means easier time raising new debt

Question 5

Debt to total assets ratio

Also Debt ratio

Answer 5

Total debt/
Total assets

Numerically the same as total Debt it to capital

Total debt burden Is measured bye debt per dollar of assets

Question 6

Times interest earned

Answer 6

Earnings coverage

EBIT/
Interest expense

Eva must exclude non-recurring items such as extraordinary items, discontinued operations, affects of accounting changes

Denominator should include capitalize interest

Ability to pay interest!

Question 7

Earnings to fixed charges

Answer 7

Earnings coverage

EBIT plus interest on operating leases /
Interest plus interest expense on operating leases plus Dividends on preferred stock

Note: Fix charges include interest required principal payments and Leases

Alternate

earnings before fix charges and taxes/
Fix charges

Question 8

Cash flow to fix charges

Answer 8

Eliminates problem of accrual
Earnings coverage

Cash flow from operations plus fix charges plus tax payments/
Fixed charges

Question 9

What are the four solvency Ratios related to capital structure

Answer 9

1. Debt to capital
2. Debt to total assets
3. Long-term debt to capital
4. Debt to equity

Question 10

What are the three earnings coverage ratio’s

Related to solvency

Answer 10

Times interest earned

FCCR (fixed charge coverage ratio) or
Earnings to fixed charges

Cash flow to fix charges