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 for Montrose as shown in Table 1 below. Table 1 Montrose Cable Company Year Ended March 31, 2017 (USD Thousands) Balance Sheet Current assets Fixed assets Total assets Current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity Income Statement Revenue Operating and administrative expenses Operating income Depreciation and amortization Interest expense Income before income taxes Taxes Net income $4,720 43,210 $47,930 4,500 10,000 $14,500 33,430 $47,930 $18,580 14,100 $4,480 1,695 943 $1,842 733 $1,100 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 Ratins and Credit Yield Premium Data for Montrose Table 2 Selected Ratios and Credit Yield Premium Data for Montrose EBITDA/interest expense Long-term debt/equity Current assets/current liabilities Credit yield premium over U.S. Treasuries 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 $980,000. . Montrose has sold $520,000 of accounts receivable with recourse at a yield of 8 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 10 percent. The annual payment will be $1,000,000. 4.75 0.30 1.05 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 8 percent. 1. EBITDA/interest expense: 2. Long-term debt/equity: 3. Current assets/current liabilities: 59 basis points 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. Fialitate whether or not the 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 vield 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. Interest Coverage Leverage Current Ratio Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- -Select- -Select-v O 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 elect sufficient to compensate Smith for the credit risk of the bond. Interest Coverage Leverage Current Ratio arest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- -Select- AA A BBB BB The current rating of the Promo basis points -Select-sufficient bond as an "A" -Select- the effect of to compensate Smith for the credit risk of the bond. ince-sheet items, sta Densates Smith for the credit risk of the bond, based on the internal bond-rating criteria s to the nearest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- V -Select- -Select- v of the Montrose bond as an "A" -Select- sufficient to compensate S-Select- does not incorporate incorporate the effect of the off-balance-sheet it- of the bond. The current rating of the Montrose bond as an "A"-Select- basis points -Select-sufficient to compensate Smith for the credit risk t -Select- is is not 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 for Montrose as shown in Table 1 below. Table 1 Montrose Cable Company Year Ended March 31, 2017 (USD Thousands) Balance Sheet Current assets Fixed assets Total assets Current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity Income Statement Revenue Operating and administrative expenses Operating income Depreciation and amortization Interest expense Income before income taxes Taxes Net income $4,720 43,210 $47,930 4,500 10,000 $14,500 33,430 $47,930 $18,580 14,100 $4,480 1,695 943 $1,842 733 $1,100 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 Ratins and Credit Yield Premium Data for Montrose Table 2 Selected Ratios and Credit Yield Premium Data for Montrose EBITDA/interest expense Long-term debt/equity Current assets/current liabilities Credit yield premium over U.S. Treasuries 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 $980,000. . Montrose has sold $520,000 of accounts receivable with recourse at a yield of 8 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 10 percent. The annual payment will be $1,000,000. 4.75 0.30 1.05 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 8 percent. 1. EBITDA/interest expense: 2. Long-term debt/equity: 3. Current assets/current liabilities: 59 basis points 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. Fialitate whether or not the 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 vield 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. Interest Coverage Leverage Current Ratio Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- -Select- -Select-v O 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 elect sufficient to compensate Smith for the credit risk of the bond. Interest Coverage Leverage Current Ratio arest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- -Select- AA A BBB BB The current rating of the Promo basis points -Select-sufficient bond as an "A" -Select- the effect of to compensate Smith for the credit risk of the bond. ince-sheet items, sta Densates Smith for the credit risk of the bond, based on the internal bond-rating criteria s to the nearest whole number. Credit Yield Premium over U.S. Treasuries Bond Rating (in basis points) -Select- V -Select- -Select- v of the Montrose bond as an "A" -Select- sufficient to compensate S-Select- does not incorporate incorporate the effect of the off-balance-sheet it- of the bond. The current rating of the Montrose bond as an "A"-Select- basis points -Select-sufficient to compensate Smith for the credit risk t -Select- is is not