Which of the following statements regarding the capitalization of interest expense is least accurate? The capitalization...

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.

Solutions

Expert Solution

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.

jeff jeffy answered 2 years ago

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