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00-Text-Ch6 Answers To Additional Problems Updated

This document contains suggested answers to additional problems from Chapter 6 of the 10th Edition of the textbook "Analysis for Financial Management" by Robert C. Higgins. The problems and answers provide financial information about Baltimore Beverages Company over several years, including their EBIT, interest expense, times interest earned ratio, and ability to take on more debt. They also contain sample calculations for a company's earnings, interest coverage ratios, and breakeven point under different financing options.

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26 views

00-Text-Ch6 Answers To Additional Problems Updated

This document contains suggested answers to additional problems from Chapter 6 of the 10th Edition of the textbook "Analysis for Financial Management" by Robert C. Higgins. The problems and answers provide financial information about Baltimore Beverages Company over several years, including their EBIT, interest expense, times interest earned ratio, and ability to take on more debt. They also contain sample calculations for a company's earnings, interest coverage ratios, and breakeven point under different financing options.

Uploaded by

zombies_me
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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ANALYSIS FOR FINANCIAL MANAGEMENT

10TH Edition
Robert C. Higgins
Suggested Answers to Additional Problems
Chapter 6
1) a. and b.
Baltimore Beverages Company
($ millions)
EBIT (aka, operating profit)

10.35 $

15.41 $

16.95 $

18.65 $

20.51 $

22.56

Interest expense

5.33

5.82

5.81

5.76

5.66

5.52

Times interest earned

1.94

2.65

2.92

3.24

3.62

4.09

% EBIT can fall

0.48

0.62

0.66

0.69

0.72

0.76

c. According to Table 6.5 in the text, companies with BB rated debt had a median coverage ratio of 3.5
times, while B rated debt had a coverage ratio of 1.4 times. This suggests that Baltimore Beverages
1.94 coverage ratio in 2010 would earn a BB or BB- debt rating.
d. With a coverage ratio of 1.94, significantly increasing financial leverage would be quite aggressive,
putting the companys debt well into the speculative, or junk, categories.
2) a. EBIT = [40/(1 0.36)]+15 = $77.5.
Interest = $15 + 0.07(40) = $17.8. Times-interest-earned = 77.5/17.8 = 4.35 times.
b. Burden of interest and sinking fund before tax = 17.8 + (14 + 8)/(1- 0.36) = $52.17.
Times burden covered = 77.5/52.18 = 1.49 times
c. EPS = (77.5 17.8)(1 0.36)/18 = $2.12.
d. Times interest earned = 77.5/15 = 5.17 times. Times burden covered = 77.5/[15 + 14/(1 0.36)] =
2.10 times. EPS = (77.5 15)(1 0.36)/(18 + 2) = $2.00.
3) EPS with new debt financing equals (EBIT 50 [0.14*150])(1-0.34)/80. EPS with new equity
financing equals (EBIT 50)(1-0.34)/95. Setting the two equations equal and solving for EBIT we get
the breakeven EBIT equal to $183 million.

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