Question

In: Finance

Estee Lauder e.l.f. Beauty Total assets ?$9 ,223, 3009, ?$414,729 Total liabilities 5, 635, 900 273...

	Estee Lauder	e.l.f. Beauty
Total assets	?$9 ,223, 3009,	?$414,729
Total liabilities	5, 635, 900	273 ,867
EBIT	1 , 626 ,100	26, 095
Interest expense	70 ,800	16, 283

a. Calculate the debt ratio and the times interest earned ratio for each company. In what way are these companies similar in terms of their debt? usage, and in what way are they very? different?

b. Calculate the ratio of interest expense to total liabilities for each company.? Conceptually, what do you think this ratio is trying to? measure? Why are the values of this ratio dramatically different for these two?forms? Suggest some reasons.

a. The debt ratio for Estee Lauder is

The debt ratio for e.l.f. Beauty is

?(Round to three decimal? places.)The times interest earned ratio for Estee Lauder is

?(Round to three decimal? places.)The times interest earned ratio fore.l.f. Beauty is

?(Round to three decimal? places.)

In what way are these companies similar in terms of their debt? usage, and in what way are they very?different????(Select the best answer? below.)

A.a

B.c

C.d

D.b

b. The ratio of interest expense to total liabilities for Estee Lauder is

?(Round to three decimal?places.)The ratio of interest expense to total liabilities for e.l.f. Beauty is

nothing.

?(Round to three decimal? places.)

?Conceptually, what do you think this ratio is trying to? measure? Why are the values of this ratio dramatically different for these two? forms????(Select the best answer? below.)

A.d

B.b

C.a

D.c

Solutions

Expert Solution

(a) Estee Lauder:

Total Liability = $ 5635900 and Total Assets = $ 92233009

Debt Ratio = 5635900 / 92233009 = 0.0611

Interest Expense = $ 70800 and EBIT = $ 1626100

Times Interest Earned (Interest Coverage Ratio) = 1626100 / 70800 = 22.967

elf Beauty:

Total Liability = $ 273867 and Total Assets = $ 414729

Debt Ratio = 273867 / 414729 = 0.6603

Interest Expense = $ 16283 and EBIT = $ 26095

Times Interest Earned (Interest Coverage Ratio) = 26095 / 16283 = 1.603

(b) Estee Lauder:

Interest Expense = $ 70800 and Total Liabilities = $ 5635900

Ratio of Interest Expense to Total Liabilities = 70800 / 5635900 = 0.0126

elf Beauty:

Interest Expense = $ 16283 and Total Liabilities = $ 273867

Ratio of Interest Expense to Total Liabilities = 16283 / 273867 = 0.0595

Conceptually this ratio tries to measure the cost of borrowing per unit of borrowing,with the numerator (the interest expense) being the cost and the denominator (the total liability) being the magnitude of borrowing. The cost of borrowing per unit of borrowing is also known as the cost of debt. The cost of borrowing is dramatically different for the two firm's because Estee Lauder has moderate/low interest expense for its borrowings whereas elf Beauty has high/moderate interest expense in lieu of its borrowings.

jeff jeffy answered 2 years ago

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