Leenid is concerned that a pending change in accounting rules could affect the results of the initial screening process. One current screen excludes bonds when the financial leverage ratio (equity multiplier) exceeds a given level and/or the interest coverage ratio falls below a given level for a given bond rating. For example, any A rated bond of a company with a financial leverage ratio exceeding 2.0 or an interest coverage ratio below 6.0 would fail the initial screening. The failing bonds are eliminated from further analysis using the quantitative model.

Will the change in accounting rules impact the result of the initial screening process for Colorful Concepts?

A. It passes the screens now, but will not pass if the accounting rules change.

B. It passes the screens now and will continue to pass if the accounting rules change.

C. It fails the screens now and will continue to fail if the accounting rules change.

Selected Financial Data for Silk Road Stores and Colorful Concepts EXHIBIT 1 Colorful Concepts Silk Road 3,945 7,049 Revenue EBIT 318 865 Interest expense 21 35 Income taxes 121 302 Net income 176 528 3,844 Average total assets 2,075 Average total equity 1,156 2,562 Lease expense 406 213 While examining the balance sheet for Colorful Concepts, Leenid also discovers that the company has a 204 ending asset balance (188 beginning) for investments in associates, primarily due to its 20 percent interest in the equity of Exotic Imports. Exotic Imports is a specialty retail chain and in the most recent year reported 1,230 in sales, 105 in net income, and had average total assets of 620. Selected Financial Data for Silk Road Stores and Colorful Concepts EXHIBIT 1 Colorful Concepts Silk Road 3,945 7,049 Revenue EBIT 318 865 Interest expense 21 35 Income taxes 121 302 Net income 176 528 3,844 Average total assets 2,075 Average total equity 1,156 2,562 Lease expense 406 213 While examining the balance sheet for Colorful Concepts, Leenid also discovers that the company has a 204 ending asset balance (188 beginning) for investments in associates, primarily due to its 20 percent interest in the equity of Exotic Imports. Exotic Imports is a specialty retail chain and in the most recent year reported 1,230 in sales, 105 in net income, and had average total assets of 620