Problem 15 in Chapter 3 asks you to construct a five-year financial projection for Aquatic Supplies beginning in 2022. Based on your forecast or the suggested answer available through McGraw-Hill’s Connect, answer the following questions.

a. Calculate the company’s times-interest-earned ratio for each year from 2021 to 2026.

b. Calculate the percentage EBIT can fall before interest coverage dips below 1.0 for each year from 2021 to 2026.

c. Consulting Table 6.5 in the text, what bond rating would Aquatic Supplies have in 2021 if the rating was based solely on the firm’s interest coverage ratio?

d. Based on this rating, would a significant increase in financial leverage be a prudent strategy for Aquatic Supplies?

Data from Problem 15 chapter 3

This problem asks you to prepare one- and five-year financial forecasts and conduct some sensitivity analysis and scenario analysis for Aquatic Supplies Company. A spreadsheet containing the company’s 2021 financial statements and management’s projections is available for download from McGraw-Hill’s Connect or your course instructor (see the Preface for more information). Use this information to answer the questions posed in the spreadsheet.

TABLE 6.5 Times Interest Earned by Rating Category

Transcribed Image Text:

(Median values for nonfinancial firms in 2020) AAA 20.4 Times interest earned AA 18.3 A 11.6 ВВВ 6.5 ВВ 3.8 B 1.5 ССС-С 0.7