Question

The Shelby District Electric Company, headquartered in Joplin, Missouri, provides electric services and also distributes natural gas to customers primarily in the state Missouri, Kansas, Oklahoma, and Arkansas. A devastating tornado with winds exceeding 200 miles per hour hit Joplin on May 22, 2011 killing over 160 people. Property damage was extensive with a path of destruction of 13 miles long and up to three-fourths of a mile wide. For Shelby district, 4,000 power poles and 100 miles of electric lines were down; six substations were damaged leaving approximately 20,000 customer without power. The company suspended its dividend in the face of storm costs that might reach $30 million. The following summary financial items are taken from the financial statements for the year ending December 31, 2011 (dollars in thousands).

Total assets	7,264,000
Current Liabilities	1,024,000
Shareholder's equity	1,848,000
Interest expense	200,000
pretax income	256,000

Compute the following four ratios. In one sentence per ration, explain what it tells you about Shelby District,

1. Deb-to-equity

2. Long-term-debt-to-total-capital

3. Debt to total assets

4. Interest-coverage ratio

Answer 1

Answer :

Debt Equity Ratio	2.38
Long term debt to total debt ratio	0.70
Debt to total assets	0.60
Interest coverage ratio	2.28

• Debt Equity ratio of 2.38 shows that the has major share of debt in its capital employed.
• Long term debt to total debt ratio of ).70 shows the non-current liabilities are more than the current liabilities.
• Debt to total assets of 0.60 shows that Debt constitutes 60% of the total assets. Shareholder's equity and current liability constitute of only 40%.
• The interest coverage ratio of 2.28 times shows the company has sufficient profits to repay interest.

Calculations:

	Particulars	Amount
A	Debt	$ 4,392,000
B	Equity	$ 1,848,000
A/B	Debt Equity Ratio	2.38
	Particulars	Amount
A	Long term debt	$ 4,392,000
B	Total capital	$ 6,240,000
A/B	Long term debt to total debt ratio	0.70
	Particulars	Amount
A	Debt	$ 4,392,000
B	Total assets	$ 7,264,000
A/B	Debt to total assets	0.60
	Particulars	Amount
A	Profit before interest and tax	$    456,000
B	Interest	$    200,000
A/B	Interest coverage ratio	2.28

​​​​​​​In case of any doubt, please comment.