2/22/25, 10:19 AM Course ID: 31517 - Module 4 Homework Assignment - Answer sheet

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Question 1 Marked out of 25.00  Report an issue

Assigning a Long-Term Debt Rating Using Financial Ratios

Refer to the information below from Stryker’s financial statements.

Selected Information (in $ millions)

Revenue $13,601 Interest expense, gross $181

Depreciation expense 306 Dividends 717

Amortization expense 417 Cash and cash equivalents 3,616

Operating profit (EBIT) 2,537 Marketable securities 83

Total debt 9,859 Average assets 24,713

Cash from operating activities 2,610 CAPEX 572

Funds from operations (FFO) 2,852

Required
a. Compute the following Moody’s metrics for Stryker and identify the Moody's rating (or rating range if the metric is between two ratings) for
each metric, using the measures in Exhibit 4.4. If a metric isn't a ratio, enter the amount in the "Result" column.

Rating or Rating
Numerator Denominator Result range

1. Debt/EBITDA Total debt EBITDA

$ 9,859 $ 3,260 3.0242 Baa to Ba

2. EBITA to interest expense EBITA Interest expense

$ 2,954 $ 181 16.3204 Aa to A

3. Revenue (in $ billions) $ 13.601 A to Baa

4. EBITA margin EBITA Revenue

$ 2,954 $ 13,601 21.72 % Aa to A

5. Operating margin EBIT Revenue

$ 2,537 $ 13,601 18.65 % Aa to A

6. Funds from operations/Debt FFO Total debt

$ 2,852 $ 9,859 28.93 % Baa to Ba

7. (Funds from operations +

Interest expense)/Interest
expense FFO + Interest Interest expense

$ 3,033 $ 181 16.7569 Aa to A

8. EBITA to average assets EBITA Average assets

$ 2,954 $ 24,713 11.95 % A to Baa

9. CAPEX/Depreciation expense CAPEX Depreciation expense

$ 572 $ 306 1.8693 Aaa

b. Based on the metrics calculated in a., the two lowest ratings for Stryker were related to solvency ratios. The rest of the metrics are

in ratings from a high of Aaa to a low of Baa

You have correctly selected 45.

Solution

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Intermediate Calculations

EBIT $2,537

Amortization expense 417

EBITA $2,954

Depreciation expense 306

EBITDA $3,260

a.

Moody's metrics Numerator Denominator Metric Rating

1. Debt to EBITDA $9,859 $3,260 3.0242 Baa to Ba

2. EBITA / Interest expense $2,954 $181 16.3204 Aa to A

3. Revenue in $B 13.601 A to Baa

4. EBITA Margin $2,954 $13,601 21.72% Aa to A

5. Operating Margin $2,537 $13,601 18.65% Aa to A

6. FFO / Debt $2,852 $9,859 28.93% Baa to Ba

7. (FFO + Interest expense) / Interest expense $3,033 $181 16.7569 Aa to A

8. EBITA / Average assets $2,954 $24,713 11.95% A to Baa

9. CAPEX / Depreciation expense $572 $306 1.8693 Aaa

b. Stryker’s ratios reflect the fact that the company is relatively strong, it’s a mature company with solid earnings and cash flow. The debt-
based solvency ratios indicate a lower credit rating ( in the Baa to Ba) than the profit, coverage, and cash flow based ratios, which are all in
the Aaa to Baa range.

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2/22/25, 10:19 AM Course ID: 31517 - Module 4 Homework Assignment - Answer sheet

Question 2 Marked out of 25.00  Report an issue

Compute and Interpret Liquidity, Solvency, and Coverage Ratios

Selected balance sheet and income statement information for Home Depot for two recent years follows.

$ millions Current Year Prior Year

Cash $2,757 $2,343

Accounts receivable 3,317 3,426

Current assets 32,471 29,055

Current liabiliites 23,110 28,693

Short-term debt - 1,035

Current installments of long-term debt 1,231 2,447

Current operating lease liabilities 945 830

Long-term debt, excluding current installments 41,962 36,604

Long-term operating lease liabilities 6,226 5,353

Total liabilities 74,883 73,572

Treasury stock (87,298) (80,794)

Total stockholders’ equity (deficit) 1,562 (1,696)

Interest expense 1,617 1,347

Earnings before interest and taxes (EBIT) 24,039 23,040

Cash from operating activities (Operating cash) 14,615 16,571

Depreciation and amortization 2,975 2,862

Capital expenditures 3,119 2,566

Required

Compute the following ratios for both years:

Capital Structure Ratios Coverage Ratios Liquidity Ratios

Liabilities-to-equity ratio Times interest earned Current ratio

Total debt-to-equity ratio EBITDA coverage ratio Quick ratio

Cash from operations to total debt

Free operating cash flow to total debt

Compute the capital structure ratios.

Capital structure ratios Numerator Denominator Result

Liabilities-equity ratio Total liabilities Equity (deficit)

Current year $ 74,883 $ 1,562 47.94

Prior year $ 73,572 $ (1,696) -43.38

Total debt-to-equity ratio Total debt Equity (deficit)

Current year $ 50,364 $ 1,562 32.24

Prior year $ 46,269 $ (1,696) -27.28

Home Depot had significant balances in Treasury stock in both years. When analyzing the company's capital structure, these

amounts distort total stockholders' equity.

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Analysts commonly adjust negative and small balances in stockholders’ equity caused by large levels of treasury stock. One way to handle this
is to add back the treasury stock balance to both total equity and total assets. Use this adjustment technique to restate Home Depot’s capital
structure ratios.

Adjusted capital structure ratios Numerator Denominator Result

Liabilities-to-equity ratio Total liabilities Equity (deficit)

Current year $ 74,883 $ 88,860 0.84

Prior year $ 73,572 $ 79,098 0.93

Total debt-to-equity ratio Total debt Equity (deficit)

Current year $ 50,364 $ 88,860 0.57

Prior year $ 46,269 $ 79,098 0.58

The adjusted capital structure ratios indicate that Home Depot is primarily financed by investors .

Compute the coverage ratios.

Coverage ratios Numerator Denominator Result

Times interest earned EBIT Interest expense

Current year $ 24,039 $ 1,617 14.87

Prior year $ 23,040 $ 1,347 17.10

EBITDA coverage ratio EBITDA Interest expense

Current year $ 27,014 $ 1,617 16.71

Prior year $ 25,902 $ 1,347 19.23

Cash from operations to total debt Operating cash flow Total debt

Current year $ 14,615 $ 50,364 0.29

Prior year $ 16,571 $ 46,269 0.36

Free operating cash flow to total

debt Free cash flow Total debt

Current year $ 11,496 $ 50,364 0.23

Prior year $ 14,005 46,269 0.30

Home Depot's coverage ratios were strongest in the prior year.

Compute the liquidity ratios.

Liquidity Ratios Numerator Denominator Result

Current ratio Current assets Current liabilities

Current year $ 32,471 $ 23,110 1.405

Prior year $ 29,055 $ 28,693 1.013

Quick ratio Quick assets Current liabilities

Current year $ 6,074 23,110 0.263

Prior year $ 5,769 28,693 0.201

In the current year, how would Home Depot compare to a company with a current ratio of .98? more liquid

You have correctly selected 65.

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Solution

Capital structure tab

Capital structure ratios Current year Prior year

Total liabilities $74,883 $73,572

Stockholders' equity (deficit) $1,562 $(1,696)

Liabilities to equity ratio 47.94 (43.38)

Short-term debt $- $1,035

Current installments of long-term debt 1,231 2,447

Current operating lease liabilities 945 830

Long-term debt, excluding current installments 41,962 36,604

Long-term operating lease liabilities 6,226 5,353

Total debt $50,364 $46,269

Stockholders' equity (deficit) $1,562 $(1,696)

Total debt to equity ratio 32.24 (27.28)

Home Depot's capital structure ratios are non-sensical because Equity is so low in the current year and negative in the prior year. This is due
to the large treasury stock balance. We cannot interpret these ratios.

Intermediate Calculation

Adjusted equity Current year Prior year

Stockholders' equity, as reported $1,562 $(1,696)

Treasury stock 87,298 80,794

Stockholders' equity, as adjusted $88,860 $79,098

Adjusted capital structure ratios Current year Prior year

Total liabilities $74,883 $73,572

Stockholders' equity, as adjusted 88,860 79,098

Liabilities to adjusted equity ratio 0.84 0.93

Total debt $50,364 $46,269

Adjusted equity $88,860 $79,098

Total debt to adjusted equity ratio 0.57 0.58

Home Depot's capital structure ratios make much more sense now. The adjustment creates ratios that we can interpret. Based on these
adjusted ratio, the company's capital structure appears sound and there are no solvency concerns.

Coverage tab

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Coverage ratios Current year Prior year

Earnings before interest and tax (EBIT) $24,039 $23,040

Interest expense $1,617 $1,347

Times interest earned 14.87 17.10

EBIT $24,039 $23,040

Depreciation and amortization expense 2,975 2,862

EBITDA $27,014 $25,902

Interest expense $1,617 $1,347

EBITDA coverage 16.71 19.23

Cash from operations $14,615 $16,571

Total debt $50,364 $46,269

Cash from operations to total debt 0.29 0.36

Cash from operations $14,615 $16,571

CAPEX 3,119 2,566

Free cash flow $11,496 $14,005

Total debt $50,364 $46,269

Free operating cash flow to total debt 0.23 0.30

Home Depot's coverage ratios all weakened slightly during the current year. Yet, the ratios are very strong and there is no cause for concern
about the company’s ability to cover its fixed charges and repay the principal owing on its debt.
Liquidity tab

Liquidity ratios Current year Prior year

Current assets $32,471 $29,055

Current liabilities $23,110 $28,693

Current ratio 1.405 1.013

Cash and equivalents $2,757 $2,343

Accounts receivable, net 3,317 3,426

Quick assets $6,074 $5,769

Current liabilites $23,110 $28,693

Quick ratio 0.263 0.201

Both the quick ratio and current ratio increased slightly during the current year: the ratios are quite strong and the company is very liquid.

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2/22/25, 10:19 AM Course ID: 31517 - Module 4 Homework Assignment - Answer sheet

Question 3 Marked out of 25.00  Report an issue

Compute and Interpret the Z-score

Information from the balance sheet, income statement, and statement of cash flows for Nike follows. Refer to these financial statements to
answer the requirements.
Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces
below with two decimal places. Assume EBIT is defined as operating income.

NIKE INC.

Consolidated Income Statements

May 31, May 31,

For Year Ended ($ millions) 2019 2018

Revenues $39,117 $36,397

Cost of sales 21,643 20,441

Gross profit 17,474 15,956

Demand creation expense 3,753 3,577

Operating overhead expense 8,949 7,934

Total selling and administrative expense 12,702 11,511

Interest expense (income), net 49 54

Other (income) expense, net (78) 66

Income before income taxes 4,801 4,325

Income tax expense 772 2,392

Net income $4,029 $1,933

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NIKE INC.

Consolidated Balance Sheets

May 31, May 31,

$ millions (except share price) 2019 2018

Current assets

Cash and equivalents $4,466 $4,249

Short-term investments 197 996

Accounts receivable, net 4,272 3,498

Inventories 5,622 5,261

Prepaid expenses and other current assets 1,968 1,130

Total current assets 16,525 15,134

Property, plant and equipment, net 4,744 4,454

Identifiable intangible assets, net 283 285

Goodwill 154 154

Deferred income taxes and other assets 2,011 2,509

Total assets $23,717 $22,536

Current liabilities

Current portion of long-term debt $6 $6

Notes payable 9 336

Accounts payable 2,612 2,279

Accrued liabilities 5,010 3,269

Income taxes payable 229 150

Total current liabilities 7,866 6,040

Long-term debt 3,464 3,468

Deferred income taxes and other liabilities 3,347 3,216

Shareholders’ equity

Common stock at stated value:

Class A convertible—315 and 329 shares outstanding 0 0

Class B—1,253 and 1,272 shares outstanding 3 3

Capital in excess of stated value 7,163 6,384

Accumulated other comprehensive income (loss) 231 (92)

Retained earnings 1,643 3,517

Total shareholders’ equity 9,040 9,812

Total liabilities and shareholders’ equity $23,717 $22,536

Shares outstanding 1,253 1,272

Company's closing stock price per share $77.14 $71.80

Compute and compare the Altman Z-scores for both years.

Note: Assume EBIT is defined as operating income.

Year Z-score

2018 7.25917

2019 6.78325

Which of the following

Module explain
4 Homework the trend
Assignment in the
- John Z-scores
Hopkins from 2018 to 2019? |(Specify
([email protected]) Yesor
Copyright NoCambridge
2025 for each statement.)
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2/22/25, 10:19 AM Course ID: 31517 - Module 4 Homework Assignment - Answer sheet

Nike improved its working capital by decreasing its current liabilities. No

Nike decreased its liquidity due to an increase in retained earnings. No

Nike improved its earnings before interest and taxes by increasing its total net sales. Yes

The market value of Nike's equity improved over the year. Yes

You have correctly selected 6.

Ratio 2019 2018 Weight 2019 Score 2018 Score

Working capital to total assets 0.365 0.404 1.20 0.438 0.484

Retained earnings to total assets 0.069 0.156 1.40 0.097 0.218

EBIT to total assets 0.201 0.197 3.30 0.664 0.651

Market value of equity to total liabilities 6.586 7.178 0.60 3.951 4.307

Sales to total assets 1.649 1.615 0.99 1.633 1.599

Z-score 6.783 7.259

Statement Yes or No

Nike improved its working capital by decreasing its current liabilities. No

Nike decreased its liquidity due to an increase in retained earnings. No

Nike improved its earnings before interest and taxes by increasing its total net sales. Yes

The market value of Nike's equity improved over the year. Yes

Question 4 Marked out of 25.00  Report an issue

Which of the following is not a common means for lenders to minimize potential loss.

Select one:
a. Set and enforce credit limits
b. Increase the interest rate
c. Require collateral
d. Impose covenants

Your answer is correct.

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