Chapter 7 Outline - Chapter 7 Long-Term Debt-Paying Ability...

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Chapter 7 Long-Term Debt-Paying Ability Analysis based on the Income Statement Times Interest Earned E B I T Int Exp 1. Do not include non recurring items 2. Do not include equity method earnings & minority income 3. Interest expense should include capitalized interest A strong steady ratio will indicate: An ability to meet interest payments An ability to refinance debt An ability to take on more debt An ability to obtain attractive interest rates Can also use the following: E B I T D A + Interest on Operating Leases Interest Expense + Interest on Oper Leases Use 1/3 of lease payment as an approximation of interest expense Analysis Based on the Balance Sheet Debt Ratio Total Debt Total Assets This indicates the percentage of assets financed by debt A strong ratio indicates: An ability to take on more debt An ability to borrow at lower interest rates Less risk
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Deferred Taxes Timing differences due to different tax and financial statement accounting
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