As the chief financial officer of Adirondack Designs, you have the following information: Next year’s expected net income after tax but before new financing $ 51 million Sinking-fund payments due next year on the existing debt $ 26 million Interest due next year on the existing debt $ 21 million Common stock price, per share $ 33.5   Common shares outstanding 31 million Company tax rate 35%   Calculate Adirondack’s times-interest-earned ratio for next year assuming the firm raises $61 million of new debt at an interest rate of 2 percent. Calculate Adirondack’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million. Calculate next year’s earnings per share assuming Adirondack raises the $61 million of new debt. Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.6 million new shares at $22 a share instead of raising new debt.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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As the chief financial officer of Adirondack Designs, you have the following information:

Next year’s expected net income after tax but before new financing $ 51 million
Sinking-fund payments due next year on the existing debt $ 26 million
Interest due next year on the existing debt $ 21 million
Common stock price, per share $ 33.5  
Common shares outstanding 31 million
Company tax rate 35%  
  1. Calculate Adirondack’s times-interest-earned ratio for next year assuming the firm raises $61 million of new debt at an interest rate of 2 percent.
  2. Calculate Adirondack’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million.
  3. Calculate next year’s earnings per share assuming Adirondack raises the $61 million of new debt.
  4. Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.6 million new shares at $22 a share instead of raising new debt.
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Follow-up Question

You're response for A was correct.

B is supposed to be the times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million.

C, and the three responses for D were incorrect.

Please re-evaluate your work and answers.

Note: Do not round intermediate calculations. Round "Earnings per share" answers to 2 decimal places and other answers to 1 decimal place.

 

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