6.7 As the chief financial officer of Cascade Designs, you have the following in
ID: 2750007 • Letter: 6
Question
6.7 As the chief financial officer of Cascade Designs, you have the following information:
a. Calculate Cascade’s times-interest-earned ratio for next year assuming the firm raises $70 million of new debt at an interest rate of 6 percent.
b. Calculate Cascade’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $7 million.
c. Calculate next year’s earnings per share assuming Cascade raises the $70 million of new debt.
d. Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Cascade sells 2 million new shares at $35 a share instead of raising new debt
Next year’s expected net income after tax but before new financing $70 million Sinking-fund payments due next year on the existing debt $20 million Interest due next year on the existing debt $15 million Common stock price, per share $40.00 Common shares outstanding $25 million Company tax rate 30%Explanation / Answer
Answer:
c)
d)
In$ A Next year’s expected net income after tax but before new financing 7,00,00,000 B Add back Tax @30% - $70,000,000*30/70 30000000 C=A+B EBT 10,00,00,000 D Add: Interest due next year on the existing debt 1,50,00,000 E=C+D EBIT with Existing debt 11,50,00,000 F Interest due next year on the existing debt 1,50,00,000 G Interest due next year on the new debt ($70 million*6%) 4200000 H Total Projected Interest expense next year 1,92,00,000 Times Interst Earned = EBIT / Interest E/H = $115,000,000/19,200,000 5.99 Times Burden Covered = EBIT / (Interest + (Principal Repayment / (1-TaxRate) ) $115,000,000/[19,200,000+ ((7,000,000*(1-0.3))] 4.77Related Questions
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