chapter_07 - Chapter 7 Long-Term Debt-Paying Ability TO THE...

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Unformatted text preview: Chapter 7 Long-Term Debt-Paying Ability TO THE NET 1. Walt Disney Fiscal Year Ended September 30, 2001 a. SIC 7990 Services Miscellaneous Amusement & Recreation b. Footnote 13 Commitments and Contingencies Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on the Companys results of operations, financial position or cash flows. 2. Goodyear Tire & Rubber a. Net periodic pension cost for the year ended December 31, 2001 (A) $ 138,200,000 Net Sales (B) $14,147,200,000 (AB) b. Projected benefit obligation $ 5,215,000,000 Plan assets 4,176,200,000 Projected benefit obligation in excess of plan assets $ 1,038,800,000 c. Accumulated benefit obligation $ 3,959,000,000 Plan assets 3,183,900,000 Accumulated benefit obligation in excess of plan assets $ 775,100,000 3. Flowers Foods Ratios for the 52 weeks ended December 29, 2001 1. Times interest earned 28 . $36,466,00 $10,086,00 $36,466,00 $36,466,00 00) ($26,380,0 = = + + 2. Debt Ratio 43.47% ,000 $1,099,691 00 $478,054,0 ,000 $1,099,691 $49,783,00 00 $242,057,0 00 $186,214,0 = = + + 3. Operating Cash Flow/Total Debt 160 16.72% $49,783,00 00 $242,057,0 00 $186,214,0 $79,923,00 = + + 4. Times interest earned and operating cash flow/total debt are relatively low. Debt ratio appears to be in a better position than the other two ratios. 161 QUESTIONS 7- 1. Yes, profitability is important to a firm's long-term debt- paying ability. Although the reported income does not agree with cash available in the short run, eventually the revenue and expense items do result in cash movements. Because there is a close relationship between the reported income and the ability of the entity to meet its long-run obligations, the major emphasis when determining the long-term debt-paying ability is on the profitability of the entity. 7- 2. (1) Income statement. (2) Balance sheet. The income statement approach is important because in the long run, there is usually a relationship between the reported income that is the result of accrual accounting and the ability of the firm to meet its long-term obligations. The balance sheet indicates the amount of funds provided by outsiders in relation to those provided by owners of the firm. If a high proportion of the resources have been provided by outsiders, then this indicates that the risks of the business have been shifted to outsiders. 7- 3. A relatively high, stable coverage of interest over the years is desirable. A relatively low, fluctuating coverage of interest over the years is not desirable. 7- 4. No. The auto manufacturing business is known for its cyclical nature. The times interest expense, therefore, would fluctuate materially. We would expect the auto manufacturer to finance a relatively small proportion of its long-term funds from debt....
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This note was uploaded on 07/12/2011 for the course FINANCE 7015 taught by Professor Elmo during the Spring '11 term at North Central Technical College.

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chapter_07 - Chapter 7 Long-Term Debt-Paying Ability TO THE...

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