Compute and Interpret Liabilities-to-Equity Ratio a. Compute the liabilities-to-

Question

Compute and Interpret Liabilities-to-Equity Ratio a. Compute the liabilities-to-equity, ratio for each year and discuss, any noticeable change. (The average liabilities-to-equity ratio fix the telecommunications industry is 1.70.) Do you have any concerns about the extent of Verizon's financial leverage and the company's ability to meet interest obligations? Explain. b. Verizon's capital expenditures arc expected to increase substantially as it seeks to respond to competitive pressures to upgrade the quality of its communication infrastructure. Assess Verizon's financing risks in light of this strategic direction.

Explanation / Answer

a) Liability to equity ratio = Debt / Equity

2007: (104090 - 24741) / 82869 = 0.957

2008: (111932 - 32280) / 76872 = 1.04

Comparing to industry average, company's liability to equity ratio is much below and therefore company is lower debt burdened than the industry trends which is a signal of its strong financial position.

Interest payemnt is also not a problem though interest burden has increased in 2008 and EBIT has come down but still there are sufficient margins available to debt holders for their interest payment.

b) In case of capital expenditure its obvious that debt value will rise but here company contention is not valid as debt remain at almost same level rather equity has come down and it is a signal of some concerns and it require a deeper proble into the matter.

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