Chapter 8 Homework The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in Smillions): Interest expense. 20x5 20x6 20x7 20x8 20x9 401 $364 $312 $405 $472 Net income Capitalized interest.1 Amortization of capitalized interest... 47 . 930 2,607 3,256 1,339 2,070 141 108 82 39 59 28 24 35 a. Using the reported interest expense, compute the interest coverage ratio for each year 20x5 to 20x9. The amortization of capitalized interest refers to the additional depreciation expense resulting from having a higher asset cost. Assuming that Chevron had always expensed interest as incurred: b. i. Recompute the interest coverage ratio for each year. Even though the revised EBIT would be slightly higher due to the amortization of capitalized interest, you may assume for this problem it is unchanged. Compare the two ratios (based on the reported versus restated data). Recompute income (assume a 35% marginal tax rate for interest each year; you'll note this is different from the implied effective average rate from the above pretax income and net income numbers) Discuss the effect on net income of restatement to expense all interest. ii. 111, iv. c. Discuss the effect of restatement on the five-year trend of Chevron's: i. Interest expense. ii. Interest coverage ratio. ii. Pretax income and net income. d. State which calculation of the interest coverage ratio is better for financial analysis and justify your choice. 8-2 Data from recent financial statements of SUA, which follows U.S. GAAP, and MAY, a non-U.S. company following IFRS, appears below (all data in SU.S.): SUA Income Statement R&D expense Net income Balance Sheet R&D Assets Total Assets Statement of Cash Flows Cash flow from operations $15,200 27,000 20x1 $16,500 29,000 20x2 $18,100 32,000 -0 200,000 210,00 13,000 225,000 14,000 16,000 Income Statement R&D expense Net income 20x0 $29,500 48,600 20x1 $32,400 52,200 20x2 $35,600 57,600 Balance Sheet R&D Assets Total Assets 28,800 330,000 31,500 346,000 34,600 370,000 Statement of Cash Flows Cash flow from operations 25,000 27,000 31,000 Chapter 8 Homework The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in Smillions): Interest expense. 20x5 20x6 20x7 20x8 20x9 401 $364 $312 $405 $472 Net income Capitalized interest.1 Amortization of capitalized interest... 47 . 930 2,607 3,256 1,339 2,070 141 108 82 39 59 28 24 35 a. Using the reported interest expense, compute the interest coverage ratio for each year 20x5 to 20x9. The amortization of capitalized interest refers to the additional depreciation expense resulting from having a higher asset cost. Assuming that Chevron had always expensed interest as incurred: b. i. Recompute the interest coverage ratio for each year. Even though the revised EBIT would be slightly higher due to the amortization of capitalized interest, you may assume for this problem it is unchanged. Compare the two ratios (based on the reported versus restated data). Recompute income (assume a 35% marginal tax rate for interest each year; you'll note this is different from the implied effective average rate from the above pretax income and net income numbers) Discuss the effect on net income of restatement to expense all interest. ii. 111, iv. c. Discuss the effect of restatement on the five-year trend of Chevron's: i. Interest expense. ii. Interest coverage ratio. ii. Pretax income and net income. d. State which calculation of the interest coverage ratio is better for financial analysis and justify your choice. 8-2 Data from recent financial statements of SUA, which follows U.S. GAAP, and MAY, a non-U.S. company following IFRS, appears below (all data in SU.S.): SUA Income Statement R&D expense Net income Balance Sheet R&D Assets Total Assets Statement of Cash Flows Cash flow from operations $15,200 27,000 20x1 $16,500 29,000 20x2 $18,100 32,000 -0 200,000 210,00 13,000 225,000 14,000 16,000 Income Statement R&D expense Net income 20x0 $29,500 48,600 20x1 $32,400 52,200 20x2 $35,600 57,600 Balance Sheet R&D Assets Total Assets 28,800 330,000 31,500 346,000 34,600 370,000 Statement of Cash Flows Cash flow from operations 25,000 27,000 31,000
