The process for the cost of debt assumes the times interest earned is a good proxy...

The process for the cost of debt assumes the times interest earned is a good proxy for measuring credit risk, what other financial variable if any should be considered? Does this assumption limit the results? ( each time the level of debt changes. Will this occur and does this limit the applicability of your results?
The base level of interest rates, the risk free rate, changes over time. Is this important in calculating the optimal level. Since the estimate is based on the current environment does it matter if this changes?
The beta may change over time, does keeping it constant limit your results or is that an acceptable assumption?

Expert Solution

jeff jeffy answered 6 months ago

For each year (2019 and 2018) compute Times interest earned Debt ratio Debt/equity ratio Debt to...

For each year (2019 and 2018) compute Times interest earned Debt ratio Debt/equity ratio Debt to tangible net worth ratio Balance Sheet (in thousands) 2019 2018 Current assets $ 449,195 $ 433,049 Investments 32,822 55,072 Deferred charges 4,905 12,769 Property, plant, and equipment, net 350,921 403,128 Trademarks and leaseholds 45,031 47,004 Excess of cost over fair market value of net assets acquired 272,146 276,639 Assets held for disposal 6,062 10,247 $1,161,082 $1,237,908 Total liabilities $ 689,535 $ 721,149 Total stockholders' equity 471,547 516,759 $1,161,082...

Times-Interest-Earned Ratio The Morris Corporation has $700,000 of debt outstanding, and it pays an interest rate...

Times-Interest-Earned Ratio The Morris Corporation has $700,000 of debt outstanding, and it pays an interest rate of 10% annually. Morris's annual sales are $3.5 million, its average tax rate is 35%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. 1. What is Morris's TIE ratio? Do not round intermediate calculations. Round...

Times-Interest-Earned Ration Calculated the times-interest-earned ratio for Smith & Sons Inc for 2015 and 2016 and...

Times-Interest-Earned Ration Calculated the times-interest-earned ratio for Smith & Sons Inc for 2015 and 2016 and comment on the company’s ability to pay its current interest payments. Did the company’s ability to pay its current interest changes improve? Time interest earned ration = Income before interest expense and income taxes/Interest expense Smith & Sons, Inc Balance Sheet Decemober 31, 2016 and 2015 (In millions) 2016 2015 Net sales 10,000 9,500 Cost of goods sold (5,500) (5,200)...

Debt ratio, Ratio of Liabilities to Stockholders' Equity, and Times Interest Earned Camper Company and McSead,...

Debt ratio, Ratio of Liabilities to Stockholders' Equity, and Times Interest Earned Camper Company and McSead, Inc., are the two largest toy companies. Condensed liabilities and stockholders' equity from a recent balance sheet are shown for each company as follows: Camper McSead Current liabilities $1,477,000 $3,246,000 Long-term debt 795,800 1,906,000 Total liabilities $2,272,800 $5,152,000 Total stockholders' equity 3,788,000 6,440,000 Total liabilities and stockholders' equity $6,060,800 $11,592,000 The income from operations and interest expense from the income statement for both companies...

Determine the times interest earned ratio. Round to one decimal place.

A company reports the following:Income before income tax $4,000,000Interest expense 400,000Determine the times interest earned ratio. Round to one decimal place.

Long-term debt ratio 0.3 Times interest earned 8.0 Current ratio 1.4 Quick ratio 1.0 Cash ratio...

Long-term debt ratio 0.3 Times interest earned 8.0 Current ratio 1.4 Quick ratio 1.0 Cash ratio 0.4 Inventory turnover 4.0 Average collection period 73 days Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.) INCOME STATEMENT (Figures in...

Long-term debt ratio 0.4 Times interest earned 8.0 Current ratio 1.4 Quick ratio 1.0 Cash ratio...

Long-term debt ratio 0.4 Times interest earned 8.0 Current ratio 1.4 Quick ratio 1.0 Cash ratio 0.2 Inventory turnover 5.0 Average collection period 73 days Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.) INCOME STATEMENT (Figures in...

(6) debt-to-equity ratio, (7) times interest earned, (8) profit margin relected year-end financial statements of Cabot...

(6) debt-to-equity ratio, (7) times interest earned, (8) profit margin relected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2016, were inventory, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $22,748.) CABOT CORPORATION Income Statement For Year Ended December 31, 2017 Sales $ 448,600 Cost of goods sold 297,250 Gross profit 151,350 Operating expenses 98,600 Interest expense 4,100 Income before taxes 48,650 Income taxes 19,598 Net income...

Long-term debt ratio 0.3 Times interest earned 10.0 Current ratio 1.1 Quick ratio 1.0 Cash ratio...

Long-term debt ratio 0.3 Times interest earned 10.0 Current ratio 1.1 Quick ratio 1.0 Cash ratio 0.4 Inventory turnover 3.0 Average collection period 73 days Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

Long-term debt ratio 0.1 Times interest earned 8.0 Current ratio 1.2 Quick ratio 1.0 Cash ratio...

Long-term debt ratio 0.1 Times interest earned 8.0 Current ratio 1.2 Quick ratio 1.0 Cash ratio 0.6 Inventory turnover 3.0 Average collection period 73 days Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.) Questions marks are in...

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