Question
Two Public companies both operate and sell exclusively in Canada. Both companies are direct competitors in the Retail Industry. Below is select Financial Information taken
Two Public companies both operate and sell exclusively in Canada. Both companies are direct competitors in the Retail Industry. Below is select Financial Information taken from each company's recent year end Financial Statements.NOTE: L.T.D. stands for Long Term Debt
Company 1
Net Income (Earnings)$4,800,000
Depreciation $200,000
Total Assets $10,000,000
Current Liabilities$1,000,000
Shareholder Equity$6,000,000
Income Tax Expense$350,000
Annual L.T.D. Principal Payments$3,800,000
Total Liabilities$8,000,000
Interest Expense on L.T.D.$600,000
Company 2
Net Income (Earnings)$3,700,000
Depreciation$700,000
Total Assets$8,000,000
Current Liabilities $900,000
Shareholder Equity$3,800,000
Income Tax Expense$400,000
Annual L.T.D. Principal Payments$300,000
Total Liabilities$4,000,000
Interest Expense on L.T.D. $200,000
a) Calculate the following 2 ratios for each company:Debt Service Coverage Ratio AND Debt to Equity Ratio (4 Marks)
b) If you were the Bank Lender, which company would present the least amount of risk to you and why? (4 Marks)
c) Which company has the higher Financial Leverage? Explain why. (3 Marks)
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Effective Writing A For Accountants
Authors: Claire B. May, Gordon S. May
11th Edition
0134667387, 9780134667386
