Problem 13, part (f) in Chapter 3 asks you to construct a five-year financial projection for Aquatic Supplies beginning in 2012. Based on your forecast or the suggested answer in the file C3_Problem_13_ Answer.xlsx, answer the following questions. The file is available at
www.mhhe.com/higgins10e. (Select Student Edition > Choose a Chapter > Files.)
a. Calculate the company’s annual times-interest-earned ratio over the forecast period.
b. Calculate the percentage EBIT can fall before interest coverage dips below 1.0 for each year in the forecast.
c. Consulting Table in the text, what bond rating would Aquatic Supplies have in 2011 if the rating was based solely on the firm’s interest coverage ratio?
d. Based on this rating, would a significant increase in financial lever- age be a prudent strategy for Aquatic Supplies?
TABLE
Median Values of Key Ratios by Standard & Poor’s Rating Category
(Industrial long-term debt, three-year figures, 2007–2009)
AAA | AA | A | BBB | BB | B | |
Times interest earned (X) | 30.5 | 18.3 | 11.0 | 5.8 | 3.5 | 1.4 |
EBITDA interest coverage (X) | 33.5 | 20.5 | 14.3 | 7.6 | 5.2 | 2.3 |
Funds from operations/total debt (%) | 200.7 | 73.4 | 53.0 | 34.0 | 25.3 | 12.0 |
Pretax return on capital (%) | 34.2 | 25.4 | 21.1 | 14.1 | 12.2 | 8.3 |
Total debt/capital (%) | 15.1 | 34.7 | 35.7 | 44.7 | 50.4 | 73.1 |
Number of companies | 4 | 16 | 92 | 213 | 245 | 325 |
Percent of sample companies (%) | 0.4 | 1.8 | 10.3 | 23.8 | 27.4 | 36.3 |
Variable definitions:
EBITDA = Earnings before interest, taxes, depreciation, and amortization.
Funds from operations = Net income from continuing operations plus depreciation, amortization, deferred income taxes, and other noncash items.
Pretax return on capital = EBIT/Average of beginning and ending capital, including short-term debt, current maturities, long-term debt (including amount for operating lease debt equivalent), non-current deferred taxes, and equity.
Long-term debt/capital = Long-term debt (including amount for operating lease debt equivalent) / Long-term debt + shareholders’ equity (including preferred stock) plus minority interest.
Problem 13
This problem asks you to prepare one- and five-year financial forecasts and conduct some sensitivity analysis and scenario analysis for Aquatic Supplies Company. An Excel spreadsheet containing the company’s 2011 financial statements and management’s projections is available for download at www.mhhe.com/higgins10e. (Select Student Edition > Choose a Chapter > Files.) Use this information to answer the questions posed in the spreadsheet.
We need at least 10 more requests to produce the solution.
0 / 10 have requested this problem solution
The more requests, the faster the answer.