O'Reilly logo

International Financial Statement Analysis Workbook, 2nd Edition by Michael A. Broihahn CFA, Anthony T. Cope CFA, Wendy L. Pirie CFA, Elaine Henry CFA, Thomas R. Robinson CFA

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 17

INTEGRATION OF FINANCIAL STATEMENT ANALYSIS TECHNIQUES

SOLUTIONS

1. A is correct. The capitalized value of Silk Road’s leases, the amount by which assets would increase, is estimated as the present value of the operating lease expense (payments). The present value of eight payments of 213 at 6.5 percent is 1,297.

2. B is correct. Adjusted EBIT = EBIT + Lease expense − Adjustment to depreciation = 318 + 213 − (1,297/8) = 369. Adjusted interest expense = Interest expense + Assumed interest expense on leases = 21 + (0.065 × 1, 297) = 105.3. Adjusted interest coverage ratio = 369/105.3 = 3.50.

3. C is correct. The capitalized value of the leases is added to assets and liabilities but does not impact equity. On an adjusted basis, Silk Road’s financial leverage ratio = (2,075 + 1,297)/1,156 = 2.92.

4. A is correct. Without the accounting change, Colorful Concepts has a financial leverage ratio = 3,844/2,562 = 1.50 and an interest coverage ratio = 865/35 = 24.71. These are both passing ratios. With the accounting change, the capitalized value of Colorful Concept’s leases is 2,472. The financial leverage ratio = (3,844 + 2,472)/2,562 = 2.46 and the interest coverage ratio = [865 + 406 − (2,472/8)]/[35 + (2,472 × 0.065)] = 4.91. These are both failing ratios. The change in interest rate coverage is particularly dramatic.

5. A is correct. Silk Road has higher unadjusted and adjusted financial leverage ratios and lower unadjusted and adjusted interest coverage ratios than Colorful ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required