Question

Verizon Communications financial leverage the last 3 years.

Debt to Assets Ratio: 2016= 91% 2017= 83% 2018=80%

Debt to Equity Ratio: 2016=4.68% 2017= 2.64% 2018=1.99%

Interest Coverage Ratio: 2016=5.80% 2017=5.35% 2018= 5.06%

How is Verizon financing it's assets? Discuss how much risk is associated with the bonds issued by the company? How can this risk be measured? Please Explain.

Answer 1

Verizon is financing it's assets with the help of creditors funds instead if investors funds. The debt to asset ratio is high and has been falling over the years, but it still shows that a significant portion of assts is financed by debt.

Although there is a high level of debt in the company and the higher the debt, the higher is the risks associated with the increased debt as indicated by the higher debt equity ratio, a ratio above 2 is risky. However, in this case, the risk associated with these bonds is not high as the risk is measured by the interest coverage ratio, which determines the ability of the company to service its debt as when it becomes due.

A good interest coverage ratio , is a ratio of above 2. In this case the interest coverage ratio is high , and shows that the company has sufficient revenues to service it's debt obligations by having the ability to pay interest on debt . Failing to pay the interest can lead a company to bankruptcy.