Mock Ratios: Long Term Debt Ability

Question 1

How do we calculate the debt ratio?

Answer 1

Short term debt + Long term debt / Short term debt + Long term debt + Equity (and retained earnings)!

Question 2

What does the debt ratio tell us?

Answer 2

The debt ratio tells us how the firm is financed - Debt or Equity.

So tells us for each £ or $ of equity, how much liabilities the company has.

Question 3

How do you calculate Times Interest earned?

Answer 3

EBIT / Interest Expense

Question 4

What does Times Interest Earned tell us?

Answer 4

Tells us what proportion of income the company has available to pay its interest obligations on loans.

Question 5

How do you calculate the cost of borrowing?

Answer 5

Interest Expense / (Total interest - Interest bearing debt)

Question 6

What does the cost of borrowing tell us?

Answer 6

The cost of borrowing gives us an average interest rate for the debt a company is paying off

Question 7

How do you calculate Cash Interest Coverage?

Answer 7

(CFO + Cash for interest and taxes) / Interest Paid

Question 8

What does the Cash Interest Coverage tell us?

Answer 8

Cash Interest Coverage tells us if there is enough cash on hand to make required interest payments.