In: Finance
Which of the following statements regarding the capitalization of interest expense is least accurate? The capitalization of interest expense will result in higher:
Group of answer choices
A)operating cash flow.
b) leverage ratios.
C) interest coverage ratio.
Option B is least accurate. Detailed reasoning is given for each options as below:
A) The capitalization of interest will lead to higher cost of Asset and thus Cash flow from Investing activity will fall and cash flow from operating activity will be higher.
B) Below is the formula for financial leverage
Financial Leverage = | EBIT | |
EBIT - Interest |
Combined leverage is combination of operating leverage and financial leverage
Interest capitalization will result in lower interest expense and hence denominator will increase, leading to lower financial leverage and consequently lower combined ratio.
C) Below is the formula for Interest Coverage ratio
Interest Coverage Ratio = | EBIT | ||
Interest |
Interest capitalization will result in lower interest expense and hence denominator will decrease, leading to higher Interest Coverage Ratio.