Vol. 3 LM 4 Solvency Ratios

Question 1

Calculate

fixed charge coverage

Answer 1

Numerator
* ……….EBIT + Lease payments

Denominator
* ………interest payments + Lease payments

EBIT = operating income
* revenue - COGS - operating expenses
* net income + interest + taxes

Page 215

Question 2

Calculate

interest coverage

Answer 2

Numerator
* ……….EBIT…….

Denominator
* ………interest payments….

Question 3

Calculate

debt-to-EBITDA

Answer 3

Numerator
* ……….Total debt…….

Denominator
* ………..EBITDA……..

Question 4

Calculate

financial leverage ratio

Answer 4

Numerator
* ……….average total assets

Denominator
* ………..average total equity

Question 5

Calculate

debt-to-equity ratio

Answer 5

Numerator
* ……….Total debt

Denominator
* ………..Total shareholders’ equity

Question 6

Calculate

debt-to-capital ratio

Answer 6

Numerator
* ….Total debt

Denominator
* Total debt + Total shareholders’ equity

Question 7

Calculate

debt-to-assets ratio

Answer 7

Numerator
* ………….Total debt……..

Denominator
* ………….Total assets…….

Question 8

List

coverage ratios

Answer 8

• interest coverage
• fixed charge coverage

Question 9

List

Debt Ratios

Answer 9

• debt-to-assets ratio
• debt-to-capital ratio
• debt-to-equity ratio
• financial leverage ratio
• debt-to-EBITDA

Question 10

Enumerate

solvency ratios are primarily of two types

Answer 10

• debt ratios—focus on the balance sheet and measure the amount of debt capital relative to equity capital
• coverage ratios—focus on the income statement and measure the ability of a company to cover its debt payments

Question 11

Fill in the blank

When financing a company, the use of debt constitutes ____ because interest payments are essentially fixed financing costs

Answer 11

financial leverage

Question 12

Describe

operating leverage

Answer 12

• results from the use of fixed costs in conducting the company’s business
• leverage magnifies the effect of changes in sales on operating income

Question 13

Concept

results from the use of fixed costs in conducting the company’s business

Answer 13

operating leverage

Question 14

reasons

analysts seek to understand a company’s use of debt

Answer 14

1. the amount of debt in a company’s capital structure is important for assessing the company’s risk and return characteristics, specifically its financial leverage.
2. leverage is a magnifiying effect that results from the use of fixed costs

Question 15

ratio

provides information regarding the relative amount of debt in the company’s capital structure and the adequacy of earnings and cash flow to cover interest expenses and other fixed charges as they come due

Answer 15

solvency ratio

Question 16

Describe

solvency

Answer 16

refers to a company’s ability to fulfill its long-term debt obligations

Question 17

Concept

refers to a company’s ability to fulfill its long-term debt obligations

Answer 17

solvency

Question 18

Calculate the company’s financial leverage ratio for 2016 & 2017

p. 217

Answer 18

• For 2017, average total assets were (710,009+663,170)/2 = 680,590
• average total equity was (175,942+182,352)/2 = 179,147
• financial leverage was (680,590/179,942) = 3.83
• For 2016, financial leverage was 4.07

Question 19

Calculate debt-to-assets, debt-to-capital, and debt-to-equity

p. 217

Answer 19