Mike Smith CFA an analyst with blue River investments is considering buying a Montrose cable company corporate bond. he has collected the balance sheet and income statement information from Montrose as shown below in table 1

he has also calculated the three ratios from Sean and table two below which indicate that the bond is currently rated A according to the firm's internal Bond rating criteria

Smith has decided to consider some off balance sheet items in his credit analysis as shown below and table 3

specifically Smith wishes to evaluate the impact of each of the offbound sheet items on each of the ratios found in table 2 period assume that the loan proceeds from the finance receivables would be invested at the interest rate of 10%

A. calculate the combined effect of the three off balance sheet items in table three on each of the following three financial ratio shown in table two. do not round intermediate calculations round your answer to four decimal places

B. evaluate whether or not the credit yield premium incorporates the effect of the off balance sheet items State and justify whether or not the current credit yield premium compensate Smith for the credit risk of the bond based on the internal Bond rating criteria found in the firm's internal Bond rating criteria period round your answers to the nearest whole number.

Table 1 Montrose Cable Company Year Ended March 31, 2017 (USD Thousands) Balance Sheet Current assets $4,785 Fixed assets Total assets 43,280 $48,065 4,580 10,000 Current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity $14,580 33,485 $48,065 Income Statement Revenue $18,600 Operating and administrative expenses Operating income Depreciation and amortization 14,170 $4,430 1,680 Interest expense 931 Income before income taxes Taxes Net income $1,819 715 $1,104 He has also calculated the three ratios shown in Table 2 below, which indicate that the bond is currently rated "A" according to the firm's internal bond-rating criteria. Table 2 Selected Ratios and Credit Yield Premium Data for Montrose EBITDA/interest expense 4.76 Long-term debt/equity 0.30 Current assets/current liabilities 1.04 Credit yield premium over U.S. Treasuries 59 basis points Smith has decided to consider some off-balance-sheet items in his credit analysis, as shown in Table 3. Table 3 Montrose Off-Balance Sheet Items Montrose has guaranteed the long-term debt (principal only) of an unconsolidated affiliate. This obligation has a present value of $995,000 Montrose has sold $520,000 of accounts receivable with recourse at a yield of 10 percent. Montrose is a lessee in a new noncancelable operating leasing agreement to finance transmission equipment. The discounted present value of the lease payments is $6,144,000 using an interest rate of 12 percent. The annual payment will be $1,000,000 Specifically, Smith wishes to evaluate the impact of each of the off-balance-sheet items on each of the ratios found in Table 2. Assume that the loan proceeds" from the financed receivables would be invested at interest rate of 10 percent. a. Calculate the combined effect of the three off-balance sheet items in Table 3 on each of the following three financial ratios shown in Table 2. Do not round intermediate calculations. Round your answers to four decimal places. 1. EBITDA/interest expense: 2. Long-term debt/equity: 3. Current assets/current liabilities: b. Evaluate whether or not the credit yield premium incorporates the effect of the off-balance-sheet items, state and justify whether or not the current credit yield premium compensates Smith for the credit risk of the bond, based on the internal bond-rating criteria found in the firm's internal bond-rating criteria. Round your answers to the nearest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- Interest Coverage Leverage -Select Current Ratio Select- The current rating of the Montrose bond as an "A" Select- the effect of the off- balance-sheet items, and the current credit yield premium of 59 basis points -Select- sufficient to compensate Smith for the credit risk of the bond. Table 1 Montrose Cable Company Year Ended March 31, 2017 (USD Thousands) Balance Sheet Current assets $4,785 Fixed assets Total assets 43,280 $48,065 4,580 10,000 Current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity $14,580 33,485 $48,065 Income Statement Revenue $18,600 Operating and administrative expenses Operating income Depreciation and amortization 14,170 $4,430 1,680 Interest expense 931 Income before income taxes Taxes Net income $1,819 715 $1,104 He has also calculated the three ratios shown in Table 2 below, which indicate that the bond is currently rated "A" according to the firm's internal bond-rating criteria. Table 2 Selected Ratios and Credit Yield Premium Data for Montrose EBITDA/interest expense 4.76 Long-term debt/equity 0.30 Current assets/current liabilities 1.04 Credit yield premium over U.S. Treasuries 59 basis points Smith has decided to consider some off-balance-sheet items in his credit analysis, as shown in Table 3. Table 3 Montrose Off-Balance Sheet Items Montrose has guaranteed the long-term debt (principal only) of an unconsolidated affiliate. This obligation has a present value of $995,000 Montrose has sold $520,000 of accounts receivable with recourse at a yield of 10 percent. Montrose is a lessee in a new noncancelable operating leasing agreement to finance transmission equipment. The discounted present value of the lease payments is $6,144,000 using an interest rate of 12 percent. The annual payment will be $1,000,000 Specifically, Smith wishes to evaluate the impact of each of the off-balance-sheet items on each of the ratios found in Table 2. Assume that the loan proceeds" from the financed receivables would be invested at interest rate of 10 percent. a. Calculate the combined effect of the three off-balance sheet items in Table 3 on each of the following three financial ratios shown in Table 2. Do not round intermediate calculations. Round your answers to four decimal places. 1. EBITDA/interest expense: 2. Long-term debt/equity: 3. Current assets/current liabilities: b. Evaluate whether or not the credit yield premium incorporates the effect of the off-balance-sheet items, state and justify whether or not the current credit yield premium compensates Smith for the credit risk of the bond, based on the internal bond-rating criteria found in the firm's internal bond-rating criteria. Round your answers to the nearest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- Interest Coverage Leverage -Select Current Ratio Select- The current rating of the Montrose bond as an "A" Select- the effect of the off- balance-sheet items, and the current credit yield premium of 59 basis points -Select- sufficient to compensate Smith for the credit risk of the bond