ANALYSIS FOR FINANCIAL MANAGEMENT

10TH Edition
Robert C. Higgins
Additional Problems
Chapter 6
1) a. Problem 1(f) in the Additional Problems to Chapter 3 file on this Web site asked you to prepare a 5year financial forecast for Baltimore Beverages Company. Based on your forecast, or the suggested
answer to problem 1(f), calculate the companys annual times-interest-earned ratio over the forecast
period.
b. Calculate the percentage EBIT can fall before interest coverage dips below 1.0 for each year in the
forecast.
c. Consulting Table 6.5 in the text what bond rating would Baltimore Beverages have in 2010 if the rating
were based solely on the firms coverage ratio?
d. Based on this rating, would a significant increase in financial leverage be a prudent strategy for
Baltimore Beverages?
2) As the financial vice president for Apex Enterprises, you have the following information:
Expected net income after tax next year before new financing

$40 million

Sinking-fund payments due next year on existing debt

$14 million

Interest due next year on existing debt

$15 million

Company tax rate

36%

Common stock price, per share

$20

Common shares outstanding

18 million

a. Calculate Apexs times-interest-earned ratio for next year assuming the firm raises $40 million of new
debt at an interest rate of 7 percent.
b. Calculate Apexs times-burden-covered ratio for the next year assuming annual sinking-fund payments
on the new debt will equal $8 million.
c. Calculate next years earnings per share assuming Apex raises the $40 million of new debt.
d. Calculate next years times-interest-earned ratio, times-burden-covered ratio, and earnings per share if
Apex sells 2 million new shares at $20 a share instead of raising new debt.
3) Vermont Mining wants to raise $150 million in new capital. The company can sell equity at $10 per
share, or sell bonds at par with a 14 percent coupon rate. Vermont Mining currently has an interest
expense of $50 million. The company has 80 million common shares outstanding and is in the 34
percent tax bracket. Can you calculate the cross over EBIT at which EPS from issuing new debt or
equity is the same?