Question

a. For the years 2005–2009, calculate Boeing’s:

i. Total liabilities-to-equity ratio

ii. Times interest earned ratio

iii. Times burden covered ratio

b. What percentage decline in earnings before interest and taxes could Boeing have sustained in these years before failing to cover:

i. Interest and principal repayment requirements?

ii. Interest, principal, and common dividend payments?

c. What do these calculations suggest about Boeing’s financial leverage during this period?

I am aware that this question has been submitted and answered by Chegg. However I need assistance understanding how to complete the burden ratio and how to step by step complete the remaining problems.

Chapter 2 Problem 14
a. For the years 2005 – 2009, calculate Boeing’s
i.      Total liabilities-to-equity ratio
ii.      Times interest earned ratio
iii.      Times burden covered ratio
b. What percentage decline in earnings before interest and taxes could Boeing have sustained in these years before failing to cover
i.      Interest and principal repayment requirements,
ii.      Interest, principal and common dividend payments?
c. What do these calculations suggest about Boeing’s financial leverage during this period?
	ANNUAL BALANCE SHEET
	($ MILLIONS)
	BOEING CO
			Dec09	Dec08	Dec07	Dec06	Dec05
	ASSETS
	Cash & Short-Term Investments		11,223	3,279	9,308	6,386	5,966
	Net Receivables		6,153	6,027	6,068	5,655	5,613
	Inventories		16,933	15,612	9,563	8,105	7,940
	Other Current Assets		966	1,046	2,341	2,837	2,449
			------------------	------------------	------------------	------------------	--------------
	Total Current Assets		35,275	25,964	27,280	22,983	21,968
	Gross Plant, Property & Equipment		21,579	21,042	20,180	19,310	19,692
	Accumulated Depreciation		12,795	12,280	11,915	11,635	11,272
			------------------	------------------	------------------	------------------	--------------
	Net Plant, Property & Equipment		8,784	8,762	8,265	7,675	8,420
	Investments at Equity		974	942	1,085	964	84
	Other Investments		5,522	6,243	9,803	11,641	12,407
	Intangibles		7,196	6,332	5,174	4,745	2,799
	Deferred Charges		-	-	-	-	13,251
	Other Assets		4,302	5,536	7,379	3,786	1,129
			------------------	------------------	------------------	------------------	--------------
	TOTAL ASSETS		62,053	53,779	58,986	51,794	60,058
	LIABILITIES
	Long Term Debt Due In One Year		707	560	762	1,381	1,189
	Accounts Payable		7,096	5,871	5,714	5,643	5,124
	Taxes Payable		182	41	253	670	556
	Accrued Expenses		12,822	6,169	6,637	6,106	6,590
	Other Current Liabilities		12,076	18,284	18,172	15,901	14,729
			------------------	------------------	------------------	------------------	--------------
	Total Current Liabilities		32,883	30,925	31,538	29,701	28,188
	Long Term Debt		12,217	6,952	7,455	8,157	9,538
	Deferred Taxes		-	-	1,190	-	2,067
	Minority Interest		97
	Other Liabilities		14,728	17,196	9,799	9,197	9,206
			------------------	------------------	------------------	------------------	--------------
	TOTAL LIABILITIES		59,925	55,073	49,982	47,055	48,999
	EQUITY
	Common Stock		5,061	5,061	5,061	5,061	5,061
	Capital Surplus		3,724	3,456	4,757	4,655	4,371
	Retained Earnings		10,869	9,150	16,780	10,236	15,498
	Less: Treasury Stock		17,526	18,961	17,594	15,213	13,871
			------------------	------------------	------------------	------------------	--------------
	TOTAL EQUITY		2,128	(1,294)	9,004	4,739	11,059
			------------------	------------------	------------------	------------------	--------------
	TOTAL LIABILITIES & EQUITY		62,053	53,779	58,986	51,794	60,058
	Common Shares Outstanding		726.291	698.138	736.681	757.836	760.577
	ANNUAL INCOME STATEMENT
			Dec09	Dec08	Dec07	Dec06	Dec05
	Sales		68,281	60,909	66,387	61,530	54,845
	Cost of Goods Sold		55,092	48,950	51,977	48,926	44,757
			-------------------	------------------	------------------	------------------	---------------
	Gross Profit		13,189	11,959	14,410	12,604	10,088
	Selling, General, & Administrative Exp.		9,870	6,852	7,381	7,428	6,433
			-------------------	------------------	------------------	------------------	---------------
	Operating Income Before Deprec.		3,319	5,107	7,029	5,176	3,655
	Depreciation,Depletion,&Amortization		1,273	1,179	1,130	1,158	1,092
			-------------------	------------------	------------------	------------------	---------------
	Operating Profit		2,046	3,928	5,899	4,018	2,563
	Interest Expense		604	524	608	657	713
	Non-Operating Income/Expense		289	591	827	709	391
	Special Items					(876)	578
			-------------------	------------------	------------------	------------------	---------------
	Pretax Income		1,731	3,995	6,118	3,194	2,819
	Total Income Taxes		396	1,341	2,060	988	257
			-------------------	------------------	------------------	------------------	---------------
	Income Before Extraordinary
	Items & Discontinued Operations		1,335	2,654	4,058	2,206	2,562
	Discontinued Operations		(23)	18	16	9	(7)
			-------------------	------------------	------------------	------------------	---------------
	Adjusted Net Income		1,312	2,672	4,074	2,215	2,555

Chapter 2 Problem 14 Suggested Answers									Notes:
	Boeing Company								One: Only enter answers into the "Green" Cells.
									Two: You MUST use the Excel Formulas, do NOT simply put a number in the answer cell.
a.	Ratios	Dec09	Dec08	Dec07	Dec06	Dec05			Three: A few Cells may have some guidance to help you with the answers.
	Total liabilities/equity	28.16	-42.56	5.55	9.93	4.43	<== Check figure for Cell G5 = 4.4
	Times interest earned*	3.39	7.50	9.70	6.12	3.6	<== Check figure for Cell G6 = 3.6
	Times burden covered	1.42	2.50	2.86	1.45	1.10	<== Check figure for Cell G7 = 1.1
	*EBIT = Operating profit
b.	Percentage decline in earnings before interest and taxes						Remember, you MUST include the Excel Formulas!
	before failing to cover:**
	Interest payments*						<== Check figure for Cell G11 = 72.2
	Interest & principal payments***						<== Check figure for Cell G12 = 12.9
	** Consider the ratio N/D. What percentage decline in N causes the ratio to equal 1? N
	can fall to $D, or in percentage terms to (N-D)/N, or 1-1/(N/D).
	*** Principal payments in year t equal "Long-term debt due in one year" in year t-1. The tax rate
	equals Total income taxes/pretax income.
c.	Comments

Answer 1

a 2005 2006 2007 2008 2009 i Total Liabilities to Equity Ratio        28.16      -42.56          5.55          9.93          4.43 ii Times Interest Earned Ratio EBIT (Operating income) 2046 3928 5899 4018 2563 (/) Interest 604 524 608 657 713 Ratio          3.39          7.50          9.70          6.12          3.59 iii Times Burden Covered Ratio 2005 2006 2007 2008 2009 EBIT (Numerator) 2046 3928 5899 4018 2563 Times Burden Covered = EBIT / (Interest + Principal Repayment / (1-Tax Rate)) Income Tax 396 1341 2060 988 257 Pretax Income 1731 3995 6118 3194 2819 Tax Rate          0.23          0.34          0.34          0.31          0.09 Interest 604 524 608 657 713 Principal Repayment 707 560 762 1381 1189 Principal Repayment (I-TR)     545.26     372.03     505.43     953.82 1,080.60 Denominator 1,149.26     896.03 1,113.43 1,610.82 1,793.60 Ratio          1.78          4.38          5.30          2.49          1.43 Times Burden Covered Ratio is also know as Debt Service Coverage Ratio It indicates that how many times is the company's earnings to its debt obligation Here, the numerator is before tax amount Denominator has interest before deducting tax impact. Principal Repayment has been grossed up to the extent of tax impact so as to cover the Tax Expenses Eg: If the company is earning 100 (EBIT) Its Interest Exp is 10, Loan to be repaid in the year is 90 Although it looks that the company has earned enough to service its debt, it may not be the case. EBIT 100 (-) Int 10 EBT 90 (*) Tax (20%) 18 Say 20% EAT 72 Earnings after Tax thus, here, the company will fall short of 18/-, which is actually the tax amount Thus, the company should have earned at least 90 (after tax) in order to service its principal repayment I do not know why the times covered ratio calculated by me and suggested by you do not match. However, I feel the logic is comprehendable. b. What percentage decline in earnings before interest and taxes could Boeing have sustained in these years before failing to cover i Interest and principal repayment requirements 2005 2006 2007 2008 2009 Interest + Principal Repayment (I-TR) 1,149.26     896.03 1,113.43 1,610.82 1,793.60 as calculated above This is the minimum EBIT required Existing EBIT 2046 3928 5899 4018 2563 Sustainable Fall in EBIT     896.74 3,031.97 4,785.57 2,407.18     769.40 Sustainable Fall in EBIT (%) 43.83% 77.19% 81.13% 59.91% 30.02% ii Interest, principal, and common dividend payments 2005 2006 2007 2008 2009 Interest + Principal Repayment (I-TR) 1,149.26     896.03 1,113.43 1,610.82 1,793.60 as calculated above (+) Common Dividend unable to calculate This is the minimum EBIT required 1,149.26     896.03 1,113.43 1,610.82 1,793.60 Existing EBIT 2046 3928 5899 4018 2563 Sustainable Fall in EBIT     896.74 3,031.97 4,785.57 2,407.18     769.40 Sustainable Fall in EBIT (%) 43.83% 77.19% 81.13% 59.91% 30.02% c. The company's financial leverage is high. It is increasing each year. As far as the Debt Coverage ratio is >1, it is profitable. The moment it falls below 1, the company will be unable to service its debt obligations. The debt has not increased much, but in fact the overall profitability of the copany has fallen.