Question

In 2016, Natural Selection, a nationwide computer dating service, had $534 million of assets and $217 million of liabilities. Earnings before interest and taxes were $137 million, interest expense was $30 million, the tax rate was 40 percent, principal repayment requirements were $25.2 million, and annual dividends were 20 cents per share on 21 million shares outstanding.

1. Calculate the following for Natural Selection: (Round your answers to 2 decimal places.)

a)Liabilities to equity ratio:

b)Times-interested-earned ratio:

c)Times burden covered:

1a.. What percentage decline in earnings before interest and taxes could Natural Selection have sustained before failing to cover: (Round your answers to 1 decimal place.)

a) interest payment requirements?

b) principal and interest requirements?

c) principal, interest and common dividend payments?

Answer 1

Given,

Assets = $ 534 million

Liabilities = $ 217 million

EBIT = $ 137 million

Interest expense = $ 30 million

Tax rate (t) = 40% or 0.40

Principal payment = $ 25.2 million

Dividends per share = 20 cents or $ 0.20

Shares outstanding = 21 million

Solution :-

Dividends = dividends per share x shares outstanding

= $ 0.20 x 21 million = $ 4.2 million

liabilities to equity ratio Liabilities Assets - habilities $217 million $534 million - $217 million. $217 million $317 million 0.68 (6) Times- interested-earned ratio. EBIT Interest expense $137 million $30 million 4.57

Times Burden covered EBIT Interest exp. + (Principal payment/(1-t)] $137 million $ 30 million +[$25.2 million/11 -0.40)] $137 million $ 30 milion + [$25.2 million / 0.60] $137 million $30 million t & 42 million . $ 137 million $72 million 1 1.90

a) Interest Decline payment requirements ? EBIT in Interest expense. EBIT EBIT $30 million - $137 million $137 million -$107 million = – 0.781 or -78.1% $137 million (b) Principal and interest requirements? Decline in EBIT Interest exp. +[Principal Payment/11-t) - EBIT EBIT - $30 million +[$25.2 million /1 -0.40)7-$137 million $137 million $30 million + $25.2 million/0.60-$137 million & 137 million . $30 million + $42 million - $137 million $137 million

. - $65 million – – 0.474 of - 47.4% $137 million (c) Principal, interest and common dividends. payments ? • Dividends (before- tax) = Dividends 1- t R$4.7 million - 0.40 $4.2 million O. GO - $7 million Principal (before tax) - Principal Payment - t ___+२६.२m/lion 1 - 0.40 $25.2 million 0,60 - $ 42 million

Decline in EBIT Interest - - EBIT Principal + Dividends (before tax) [before tax) EBIT $30 million + $42 million t 87 million - $137 million $ 137 million $79 million – $137 million $ 137 million -$58 million $137 million - 0.423 of – 42.3 %.