15-1. (Calculating debt ratio) (Related to Checkpoint 15.1 on page 534)Sharpgas plc£m£mCurrent assets6Current liabilities8Long-term debtSharesNon-current assets30202Reserves3636You have just taken over a portfolio of bank clients including Sharpgas Plc. Their latestbalance sheet is as above. What questions would you ask immediately with regard totheir capital structure? STEP 3: SolveCalculating the four benchmark financial ratios found in Table 15.3, we get the following:Ratio withRatioExisting Common Stock with DebtFinancingRatioFormulaRatioFinancingDebt ratioTotal Liabilities35.2%26.4%51.5%Total AssetsInterest-bearingInterest-Bearing Debt20.115.140.2debt ratioTotal AssetsTimes interestNet Operating Income or EBIT27.0831.2511.72earnedInterest ExpenseDepreciation Amortization6.848.203.08EBITDAEarnings Beforecoverage ratioInterest and TaxesExpenseExpensePrincipal PaymentsInterest Expense + (-1Tax RateSTEP 4: AnalyzeWhether the entire $10 million is raised by issuing equity or by borrowing has a dramatic effect on the firm'scapital structure. For example, the debt ratio will either drop from 35.2 percent to 26.4 percent if equity is used orincrease to 51.5 percent if debt is used. The interest-bearing debt ratio will change in a similar manner, droppingfrom 20.1 percent to 15.1 percent if equity financing is used and rising to 40.2 percent if debt financing is used.The times interest eamed ratio will rise slightly from 27.08 to 31.25 with an equity offering but will drop to only11.72 with a debt offering. The EBITDA coverage ratio, which incorporates consideration of noncash expenses(depreciation) in the numerator as well as the repayment of principal in the denominator, will increase to 8.20 from6.84 if equity is used and fall to 3.08 if debt is used.To complete our benchmark analysis, we need to compare the above leverage ratios to the following com-parable firm ratios:Comparable Firm RatioDebt ratio40%Interest-bearing debt ratio30%Times interest earned ratio22 timesEBITDA coverage ratio6 times

The balance sheet of the given company shows the breakup of current and non-current assets and…

(Calculating debt ratio) (Related to Checkpoint 15.1 on page 534) Sharpgas plc £m £m Current assets Current liabilities 8 Long-term debt Shares Non-current assets 30 20 Reserves 36 36 You have just taken over a portfolio of bank clients including Sharpgas Plc. Their latest balance sheet is as above. What questions would you ask immediately with regard to their capital structure?

(Calculating debt ratio) (Related to Checkpoint 15.1 on page 534) Sharpgas plc £m £m Current assets Current liabilities 8 Long-term debt Shares Non-current assets 30 20 Reserves 36 36 You have just taken over a portfolio of bank clients including Sharpgas Plc. Their latest balance sheet is as above. What questions would you ask immediately with regard to their capital structure?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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