Chapter7Long-TermDebt-PayingAbilityPROBLEMSPROBLEM7-1TimesInteretsEarned=RecurringEarnings,ExcludingInterestExpense,TaxExpense,EquityEarnings,andMinorityEarningsInterestExpense,IncludingCapitalizedInterestEarningsbeforeinterestandtax:Netsales$1,079,143Costofsales(792,755)Sellingandadministration(264,566)$21,822a.TimesInterestEarned=$21,822$4,311=5.06timesperyearb.Cashbasistimesinterestearned:$21,822+$40,000$4,311=$61,822$4,311=14.34timesperyearPROBLEM7-2RecurringEarningsExcludingInterestExpense,TaxExpense,EquityEarnings,a.TimesInterestEarned=andMinorityEarningsInterestExpense,IncludingCapitalizedInterestIncomebeforeincometaxes$675Plusinterest60Adjustedincome$735Interestexpense$60TimesInterestEarned=$735=12.25timesperyear$60b.FixedChargeCoverage=RecurringEarnings,ExcludingInterestExpenseTaxExpense,EqutyEarnings,andMinorityEarnings+InterestPortionofRentalsInterestExpense,IncludingCapitalizedInterest+InterestPortionofRentalsAdjustedincomefrom(parta)$7351/3ofoperatingleasepayments(1/3x$150)50Adjustedincome,includingrentals$785Interestexpense$601/3ofoperatingleasepayments50$110FixedChargeCoverage=$785=7.14timesperyear$110PROBLEM7-3RecurringEarnings,ExcludingInterestExpense,TaxExpense,EquityEarning,a.TimesInterestEarned=andMinorityEarnings________________InterestExpense,IncludingCapitalizedInterestIncomebeforeincometaxesandextraordinarycharges$36Plusinterest16(1)Adjustedincome52(2)Interestexpense$16TimesInterestEarned:(1)dividedby(2)=3.25timesperyearRecurringEarnings,ExcludingInterestExpense,TaxExpense,EquityEarnings,andMinorityEarnings+InterestPortionb.FixedChargeCoverage=OfRentals______________________________InterestExpense,IncludingCapitalizedInterest+InterestPortionOfRentalsAdjustedincome(parta)$521/3ofoperatingleasepayments(1/3x$60)20(l)Adjustedincome,includingrentals$72Interestexpense$161/3ofoperatingleasepayments20(2)Adjustedinterestexpense$36Fixedchargecoverage:(1)dividedby(2)=2.00timesperyearPROBLEM7-4a.DebtRatio=TotalLiabilitiesTotalAssets=$174,979$424,201=41.2%b.Debt/EquityRatio=TotalLiabilitiesStockholders'Equity=$174,979$249,222=70.2%c.RatioofTotalDebttoTangibleNetWorth=TotalLiabilities=$174,979=$174,979=70.9%TangibleNetWorth$249,222-$2,324$246,898d.KaufmanCompanyhasfinancedover41%ofitsassetsbytheuseoffundsfromoutsidecreditors.TheDebt/EquityRatioandtheDebttoTangibleNetWorthRatioareover70%.Whethertheseratiosarereasonabledependsuponthestabilityofearnings.PROBLEM7-5RatioTransactionTimesInterestEarnedDebtRatioDebt/EquityTotalDebt/TangibleNetWortha.Purchaseofbuildingsfinancedbymortgageb.Purchaseinventoryonshort-termloanc.Declarationandpaymentofcashdividendd.Declarationandpaymentofstockdividende.Firmincreasesprofitsbycuttingcostofsalesf.Appropriationofretainedearningsg.Saleofcommonstockh.Repaymentoflong-termbankloani.Conversionofbondstocommonstockj.Saleofinventoryatgreaterthancost--00+00++++++0-0----+++0-0----+++0-0----PROBLEM7-6a.TimesInterestEarned:Timesinterestearnedrelatesearningsbeforeinterestexpense,tax,minorityearnings,andequityincometointerestexpense.Thehigherthisratio,thebettertheinterestcoverage.Thetimesinterestearnedhasimprovedmateriallyinstrengtheningthelong-termdebtposition.Consideringthatthedebtratioandthedebttotangiblenetworthhaveremainedfairlyconstant,theprobablereasonfortheimprovementisanincreaseinprofits.Thetimesinterestearnedonlyindicatestheinterest...
