1. [Capitalization of interest] The following data were obtained from the annual reports of Chevron, a multinational oil company (all data in Smillions): 1995 1996 1997 1998 1999 Interest expense S 401 5 364 $ 312 $ 405 $ 472 Pretax income 1,789 4,740 5.502 1.834 3,648 Net income 930 2,607 3.256 1,339 2,070 Capitalized 141 108 82 39 59 interest Amortization of 47 24 28 35 y capitalized interest

a. Using reported interest expense, compute the carnings cover- age ratio (times interest earned) for each year, 1995 to 1999.

b. Assuming that Chevron had always expensed interest as incurred: (i) Recompute the earnings coverage ratio for each year. (ii) Compare the two ratios (based on reported versus re- stated data).

(iii) Recompute income (assume a 35% tax rate each year). (iv) Discuss the effect on net income of restatement to ex- pense all interest.

c. Discuss the effect of restatement on the five-year trend of Chevron's: (i) Interest expense (ii) Interest coverage ratio (iii) Pretax and net income

d. State which calculation of the interest coverage ratio is better for financial analysis and justify your choice.