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Id119 a the covenant limits the companys borrowing

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Unformatted text preview: ash flows to determine whether the company was consistently generating enough cash from operating activities to service its debt. This approach is good in that any cash payments associated with off­balance sheet financing will be reflected on the statement of cash flows. The negative aspect of this analysis approach is that the analysis cannot be adequately performed until the company is making interest and principal payments. By this time it may be too late! c. A debenture is an unsecured bond. That is, there is no collateral supporting the bond. Thus, should the company not repay the bonds, investors in debentures, unlike investors in secured bonds, do not have security in any of the company's assets that could be sold to repay the bonds. In other words, in the event a company liquidates, the secured creditors are paid before the unsecured creditors. This means that if the company does not have sufficient cash available after liquidating to repay both the secured creditors and the holders of debentures, it is the latter group that will not receive full payment. ID11–7 a. Liabilities Total assets Home Depot $23 billion $41 billion Lowe’s $15 billion $33 billion Liabilities/total assets ratio 0.56 0.45 b. If all leases are capital leases: Home Depot Liabilities + Lease liabilities Total liabilities $23 billion 2.7 billion Lowe’s $15 billion 3.6 billion $25.7 billion $18.6 billion Assets $41 billion + Lease liabilities Total Assets Adjusted liabilities/total assets ratio 0.59 $33 billion 2.7 billion $43.7 billion 3.6 billion $36.6 billion 0.51 c. Both companies saw their adjusted debt ratio increase. In both cases, the adjustment doesn’t make much of a difference since the companies already have relatively high ratios. However, adding the leases to the balance sheet does increase the leverage of the companies. d. An analyst may wish to make the adjustment required above so he/she can make equal comparisons between large retailers. By making the adjustment, the anal...
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