Question

The following information is relevant for Questions 1 and 2:
Austin Corporation's Year 8 financial statement notes include the following information:
a. Austin recently entered into operating leases with total future payments of $40 million that equal a discounted present value of $20 million.
b. Long-term assets include held-to-maturity debt securities carried at their amortized cost of $10 million. Fair market value of these securities is $12 million.
c. Austin guarantees a $5 million bond issue, due in Year 13. The bonds are issued by Healey, a nonconsolidated 30%-owned affiliate.
After analysis, you decide to adjust Austin's balance sheet for each of the above three items.
1. Among the effects of these adjustments for the times interest earned coverage ratio is (choose one of the following):
a. Lease capitalization increases this ratio.
b. Lease capitalization decreases this ratio.
c. Recognizing the debt guarantee decreases this ratio.
d. Held-to-maturity debt securities adjustment increases this ratio.
2. Among the effects of these adjustments for the long-term debt to equity ratio is (choose one of the following):
a. Only the held-to-maturity debt securities adjustment decreases this ratio.
b. Only lease capitalization decreases this ratio.
c. All three adjustments decrease this ratio.
d. All three adjustments increase this ratio.
3. What is the effect of a cash dividend payment on the following ratios (all else equal)?
Times Interest Earned Long-Term Debt to Equity
a. Increase Increase
b. No effect Increase
c. No effect No effect
d. Decrease Decrease
4. What is the effect of selling inventory for profit on the following ratios (all else equal)?
Times Interest Earned Long-Term Debt to Equity
a. Increase Increase
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease
5. The existence of uncapitalized operating leases is to (choose one of the following):
a. Overstate the earnings to fixed charges coverage ratio.
b. Overstate fixed charges.
c. Overstate working capital.
d. Understate the long-term debt to equity ratio.
(CFA Adapted)



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  • CreatedJanuary 22, 2015
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