Archimedes Torque and Gear Company has $7.4 million in long-term debt having the following payment schedule:

	AMOUNT
15% serial bonds, $100,000 payable annually in principal	$2,400,000
13% first-mortgage bonds, $150,000 payable annually in principal	3,000,000
18% subordinated debentures, interest only until maturity in 10 years	2,000,000
	$7,400,000

Archimedes’ common stock has a book value of $8.3 million and a market value of $6 million. The corporate tax rate, federal plus state, is 50 percent. Archimedes is in a cyclical business; its expected EBIT is $2 million, with a standard deviation of $1.5 million. The average debt-to-equity ratio of other companies in the industry is 0.47.

a. Determine the interest coverage and the debt-service coverage ratios for the company.

b. What are the probabilities that these two ratios will go below 1:1?

c. Does Archimedes have too much debt?

Answer rating: 100% (QA)

a Interest coverage ratio 4 Debtservice coverage ratio 34 Assuming that EBIT is 2 million the intere... View the full answer