final exam- coverage ratios

Question 1

debt coverage definition

Answer 1

Measures financial risk and financial leverage. Check if an increase or decrease of this ratio is caused by the increase/decrease in cash rather than debt.

Question 2

debt coverage equation

Answer 2

CFO/Total Debt (Current + Non Current Borrowings)

Question 3

interest coverage definition

Answer 3

measures a firm’s ability to meet interest obligations

Question 4

interest coverage equation

Answer 4

CFO + interest paid = taxes paid / interest paid (ans in times)

Question 5

reinvestment definition

Answer 5

measures a firm’s ability to acquire assets with operating cashflows. This is especially important for firms that rely on assets to generate revenue - for asset-heavy companies. Found in cash flows from investing activities section – both tangible and intangible assets.

Question 6

reinvestment equation

Answer 6

CFO/ cash paid for long term assets

Question 7

debt payment definition

Answer 7

measures ability to pay debts with operating cashflows. found in repayment of borrowings (ST and LT)

Question 8

debt payment equation

Answer 8

CFO/cash paid for long term debt repayment

Question 9

dividend payment definition

Answer 9

measures the ability to pay dividends with operating cashflows. found in financing activities. (dividend paid on ordinary shares and perpetual securities)

Question 10

dividend payment equation

Answer 10

CFO - preferred dividend/dividends paid

Question 11

investing and financing definition

Answer 11

Measures a firm’s ability to acquire assets, pay debts and make distributions to owners. [Any number from the investing and financing activities with a bracket]

Question 12

investing and financing equation

Answer 12

CFO - preferred dividends/ cash outflows for investing and financing activities