Given the above Finacail Statemtns, Calculate all of the missing performance measures in sheet “PM” (below) for Vandelay Farms.“CF” is the statement of cash flow summary for Vandelay Farms. Based on the performance ratios, is Vandelay Farms in any kind of financial trouble? Why or why not?
Homework Answers
Answer :
Interest Coverage ratio = EBIT/Interest expense
where EBIT = Earning before interest and tax
2014
Net income from operation = 33079
Interest expense = 34754
EBIT = Net income from operation + Interest expense (33079 + 34754) = 67833
Interest Coverage ratio = EBIT/Interest expense = 67833/34754 = 1.95 approx.
Term debt and lease service coverage ratio = Net operating income / Total debt service
EBIT = Net income from operation + Interest expense (33079 + 34754) = 67833
Total debt = 561097
Term debt and lease service coverage ratio = 67833/561097 = 0.12 approx.
Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans=33079 + 28156 + 24156 – 7011 + 19563= 97943
2015
Net income from operation = 40875
Interest expense = 35989
EBIT = Net income from operation + Interest expense (40875 + 35989) = 76864
Interest Coverage ratio = EBIT/Interest expense = 76864/35989= 2.14 approx.
Term debt and lease service coverage ratio = Net operating income / Total debt service
EBIT = Net income from operation + Interest expense (40875 + 35989) = 76864
Total debt = 563697
Term debt and lease service coverage ratio = 76864/563697 = 0.13 approx.
Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans=40875+ 24346+ 27552– 4360+ 20063= 124402
Capital Debt Repayment Margin = Capital Debt Repayment Capacity – scheduled principal and interest on term loans and leases = 108476– (4178+ 20063) = 84235
Replacement margin ratio = Capital Debt Repayment Capacity / (scheduled loans and leases + cash use to purchase replace asset) = 108476/ (4178+ 20063+ 6158) = 3.568
2016
Net income from operation = 38730
Interest expense = 37664
EBIT = Net income from operation + Interest expense (38730 + 37664) = 76394
Interest Coverage ratio = EBIT/Interest expense = 76394/37664= 2.02 approx.
Term debt and lease service coverage ratio = Net operating income / Total debt service
EBIT = Net income from operation + Interest expense (38730 + 37664) = 76394
Total debt = 563963
Term debt and lease service coverage ratio = 76394/563963 = 0.135 approx.
Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans=38730+ 26285+ 29206– 7603+ 19976= 126570
Capital Debt Repayment Margin = Capital Debt Repayment Capacity – scheduled principal and interest on term loans and leases = 126570– (13789+ 19976) = 92805
Replacement margin ratio = Capital Debt Repayment Capacity / (scheduled loans and leases + cash use to purchase replace asset) = 126570/ (13789+ 19976+ 23489) = 1.995
2017
Net income from operation = 43389
Interest expense = 35585
EBIT = Net income from operation + Interest expense (43389 + 35585) = 78974
Interest Coverage ratio = EBIT/Interest expense = 78974/35585= 2.22 approx.
Term debt and lease service coverage ratio = Net operating income / Total debt service
EBIT = Net income from operation + Interest expense (43389 + 35585) = 78974
Total debt = 564833
Term debt and lease service coverage ratio = 78974/564833 = 0.139 approx.
Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans=43389+ 27237+ 28308– 6686 + 19221= 111469
Capital Debt Repayment Margin = Capital Debt Repayment Capacity – scheduled principal and interest on term loans and leases = 111469– (12432+ 19221) = 79816
Replacement margin ratio = Capital Debt Repayment Capacity / (scheduled loans and leases + cash use to purchase replace asset) = 111469/ (12432+ 19221+ 26879) = 1.904
2018
Net income from operation = 42069
Interest expense = 35780
EBIT = Net income from operation + Interest expense (42069 + 35780) = 77849
Interest Coverage ratio = EBIT/Interest expense = 77849/35780= 2.17 approx.
Term debt and lease service coverage ratio = Net operating income / Total debt service
EBIT = Net income from operation + Interest expense (42069 + 35780) = 77849
Total debt = 566171
Term debt and lease service coverage ratio = 77849/566171 = 0.137 approx.
Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans=42069 + 29201 + 29364 – 2877 + 19079= 116836
Replacement margin ratio = Capital Debt Repayment Capacity / (scheduled loans and leases + cash use to purchase replace asset) = 116836/ (0 + 115648) = 1.010
Conclusion :
Based on performance ratio, Vandelay firm is not in any kind of trouble, as over the years the debt service coverage ratio has increased. The financial position of the company is sound.
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