Fairmont Golf issued fi xed rate debt when interest rates were 6 percent. Rates have since risento 7 percent. Using only the carrying amount (based on historical cost) reported on the balance sheet to analyze the company’s fi nancial position would most likely cause an analyst to:A . overestimate Fairmont’s economic liabilities.B . underestimate Fairmont’s economic liabilities.C . underestimate Fairmont’s interest coverage ratio

Fairmont Golf issued fi xed rate debt when interest rates were 6 percent. Rates have since risento 7 percent. Using only the carrying amount (based on historical cost) reported on the balance sheet to analyze the company’s fi nancial position would most likely cause an analyst to:A . overestimate Fairmont’s economic liabilities.B . underestimate Fairmont’s economic liabilities.C . underestimate Fairmont’s interest coverage ratio

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 20P

See similar textbooks

Similar questions

Hauser Corporation has $20,000,000 of outstanding debt that bears interest at a variable rate and matures on June 30, 2018. At inception of the debt, the company had a lower credit rating, and most available financing carried a variable rate. The company’s variable rate is the LIBOR rate plus 1%. However, the company’s credit rating has improved, and the company feels that a fixed, lower rate of interest would be most appropriate. Furthermore, the company is of the opinion that variable rates will increase over the next 24 months. In May 2016, the company negotiated with First Bank of Boston an interest rate swap that would allow the company to pay a fixed rate of 7% in exchange for receiving interest based on the LIBOR rate. The terms of the swap call for settlement at the end of June and December, which coincides with the company’s interest payment dates. The variable rates are reset at the end of each 6-month period for the following 6-month period. The terms of the swap are…
Edwards Construction currently has debt outstanding with a market value of $128,000 and a cost of 12 percent. The company has EBIT of $15,360 that is expected to continue in perpetuity. Assume there are no taxes. a-1. What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.) a-2. What is the debt-to-value ratio? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What are the equity value and debt-to-value ratio if the company's growth rate is 4 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.) c. What are the equity value and debt-to-value ratio if the company's growth rate is 9 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)
On September 30, Franz Corporation notices a decline in value of its investment in held-to-maturity bonds. On that date, the carrying value of the bonds is 38,500 and the fair value is 22,980. Franz evaluation of this investment reveals that expected credit losses are 10,000. Prepare the journal entry to record the impairment.
Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
ABC Company has a BB credit rating. Companies with similar credit ratings are currently paying a premium of 150 basis points (2.84%) above the yield on U.S. Treasury bonds of 2.25% p.a. on similar term bonds. The company faces a marginal tax rate of 31 percent. What would be the after-tax cost of debt used in calculating the company's weighted average cost of capital? Present your answer in percentage terms, rounded to two decimal places (e.g., 4.56%). Round your answer to 2 decimal places. Please show all work and how to set up in excel with formulas.
Bello Company has a debt-equity ratio of .6. Return on assets is 7.5 percent, and total equity is $486,000. a. What is the equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the return on equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
please help me answeer the following given Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $3,780,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industr, averages and Creek's recent financial statements, evaluate and recommend appropriate action on the loan request. Industry averages Creek Enterprises Income Statement: Debt ratio 0 50 Times interest earned ratio 7.42 Fixed-payment coverage ratio 2.03 Creek Enterprises Balance Sheet: Creek Enterprises's debt ratio is _____ (Round to two decimal places.) Creek Enterprises's times interest earned ratio is ______ (Round to two decimal places.) Creek Enterprises's fixed-payment coverage ratio is. ______ (Round to two decimal places.) Complete the following summary of ratios and compare Creek Enterprises's ratios vs. the industry average: (Round to two decimal places.) Creek Debt ratio Industry 0.50 Times…
A financial analyst at your firm notes that the firm's total interest payments this year were $10 million while total debt outstanding was $80 million, and he concludes that the cost of debt was 12.5%. What is wrong with this conclusion? Only long term debt should be used Only current liabilities should be used Excluded taxes will overestimate the cost of debt Excluding taxes will underestimate the cost of debt None of the above are correct
Starset, Inc., has a target debt-equity ratio of .80. Its WACC is 9.1 percent, and the tax rate is 25 percent. a.If the company's cost of equity is 13 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity?
“Four Cs of credit analysis” is used by analysts to evaluate creditworthiness. For each of the following scenarios, which of the “Four Cs” should be used for evaluation? Please also explain your answers. Scenarios Which of the “Four Cs” 1. Company Z cannot issue dividends unless all bondholders have been paid the interests or coupons. In addition, the dividend payments cannot be greater than 30% of company’s annual EBIT. 2. Company Y decides to issue debt, but its management is less credible with poor track records. 3. Company X has to pay $50,000 interest expense every year if debt is issued, but it only has an operating cash flow of $40,000 per year. 4. Company ABC decides to issue debt. However, it operates in an industry with 10 competitors, and it only has a market share of 3%. Investors are concerned with X’s ability to maintain stable cash flows over time.
Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the tax rate is 22 percent, what is the aftertax cost of debt?
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 111.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.4 percent annually. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the tax rate is 25 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)