Compute and Interpret Liquidity, Solvency and Coverage Ratios

Selected balance sheet and income statement information for Calpine Corporation for 2004 and 2006 follows.

($ millions)20042006Cash$ 1,376.73$ 1,503.36Accounts receivable1,097.16735.30Current assets3,563.563,168.33Current liabilities3,285.396,057.95Long-term debt16,940.813,351.63Short-term debt1,033.964,568.83Total liabilities22,628.4225,743.17Interest expense1,516.901,288.29Capital expenditures1,545.48211.50Equity4,587.67(7,152.90)Cash from operations9.89155.98Earnings before interest and taxes1,589.841,877.84

(a) Compute the following liquidity, solvency and coverage ratios for both years. (Round your answers to two decimal places.)

2006 current ratio =Answer

2004 current ratio =Answer

2006 quick ratio =Answer

2004 quick ratio =Answer

2006 liabilities-to-equity =Answer

2004 liabilities-to-equity =Answer

2006total debt-to-equity =Answer

2004total debt-to-equity =Answer

2006 times interest earned =Answer

2004 times interest earned =Answer

2006 cash from operations to total debt =Answer

2004 cash from operations to total debt =Answer

2006 free operating cash flow to total debt =Answer

2004 free operating cash flow to total debt =Answer

(b) Which of the following best describes the company's credit risk?

Both the quick ratio and current ratio for 2006 are lower than 1.0 and have increased in the past two years. Along with interest coverage ratios that are exceedingly high, the probability that the company will face default has significantly increased.

Both the quick ratio and current ratio for 2006 are lower than 1.0 and have decreased in the past two years. Along with interest coverage ratios that are exceedingly low, the probability that the company will face default has significantly increased.

Both the quick ratio and current ratio for 2006 are above 1.0 and have decreased in the past two years. Along with interest coverage ratios that are exceedingly low, the probability that the company will face default has significantly decreased.

Both the quick ratio and current ratio for 2006 are above 1.0 and have increased in the past two years. Along with interest coverage ratios that are exceedingly high, the probability that the company will face default has significantly decreased.