Determine interest coverage ratio, Financial Management

Assignment Help:

Q. Determine Interest coverage ratio?

Current interest coverage ratio = 7000/500 = 14 times

Increased profit before interest and tax = 7000 × 1.12 = $7.84m

Increased interest payment = (10m × 0.09) + 0.5m = $1.4m

Interest coverage ratio after one year = 7.84/ 1.4 = 5.6 times

The current interest coverage of Droxfol Co is elevated than the sector average and can be regarded as quiet safe. Subsequent the new loan note issue however interest coverage is less than half of the sector average, perhaps indicating that Droxfol Co mayn't find it easy to meet its interest payments.

(ii) Financial gearing

This ratio is defined here as previous charge capital/equity share capital on a book value basis

Current financial gearing = 100 × (5000 + 2500)/ (5000 + 22500) = 27%

Ordinary dividend after one year = 0.35 × 5m × 1.04 = $1.82 million

Total preference dividend = 2500 × 0.09 = $225000

Income statement after one year

412_Determine Interest coverage ratio.png

Financial gearing after one year = 100 * (15000 + 2500)/ (5000 + 22500 + 2463) = 58%

The current monetary gearing of Droxfol Co is 40% less in relative terms than the sector average and after the new loan note issue it is 29% more (in relative terms). This stage of financial gearing may be a reason of concern for investors and the stock market. Continued annual growth of 12% nevertheless will decrease financial gearing over time.


Related Discussions:- Determine interest coverage ratio

Predicting cross-sectional returns, Predicting Cross-Sectional Returns ...

Predicting Cross-Sectional Returns If the market is assumed to be efficient, all securities should lie along the security market line that relates the expected rate of return t

Traditional yield measures, Current Yield Current y...

Current Yield Current yield is defined as the annual coupon interest received on the market price.          Current Yield =

Explain the strategic alliance, Explain the Strategic alliance Two  or ...

Explain the Strategic alliance Two  or  more  organisations  agree  to  work  and  collaborate  informally  together  however remaining  independent  from  one  another. Simila

Illustrate dividend valuation model, Q. Illustrate dividend valuation model...

Q. Illustrate dividend valuation model? The business is being acquired as a going concern and earnings valuations rather than asset valuations are recommended. Even these are b

A/a2, A/A2 is generally the second- or third-highest rating that a rating a...

A/A2 is generally the second- or third-highest rating that a rating agency gives to a security or carrier. This rating indicates that there is a comparatively low risk of default a

Sovereign debt , Sovereign debt is a debt instrument guaranteed by th...

Sovereign debt is a debt instrument guaranteed by the government. The other names for sovereign debts are sovereign bonds or government bonds. They are issued in

Clearing and settlement - t- bills, Clearing and Settlement The Treasur...

Clearing and Settlement The Treasury Bills are available in physical form if an investor desires so. The market is mostly dominated by institutional players who have a facility

What financial managers look for when they analyze pro forma, What do finan...

What do financial managers look for when they analyze pro forma financial statements? Later than the pro forma financial statements are complete, financial managers analyze the f

Legal framework-asic, Legal Framework ASIC, in order to equip itself wi...

Legal Framework ASIC, in order to equip itself with its wide-ranging functions, is empowered with additional resources and new legislative powers. Towards this, the Australian

Determine the example of rate of return of a bond, Determine the example of...

Determine the example of Rate of return of a Bond A bond is paying 10 % interest per annum and is going to mature in next two years At maturity it would pay its principal amoun

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd