Chapter 8 Homework 8-1 The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in Smillions): 20x5 20x6 20x7 20x8 20x9 Interest ex Pretax income.. 1,789 4,740 5,502 1,834 3,648 Net income Capitalized interes.... Amortization of capitalized interest... Using the reported interest expense, compute the interest coverage ratio for each year 20x5 to 20x9. The amortization of capitalized interest refers to the additional depreciation expense resulting from having a higher asset cost. Assuming that Chevron had always expensed interest as incurred: 1 .. 930 2,607 3,256 1,339 2,070 59 141 47 108 24 82 28 39 35 a. b. i. Recompute the interest coverage ratio for each year. Even though the revised EBIT would be slightly higher due to the amortization of capitalized interest, you may assume for this problem it is unchanged. Compare the two ratios (based on the reported versus restated data). Recompute income (assume a 35% marginal tax rate for interest each year; you'll note this is different from the implied effective average rate from the above pretax income and net income numbers) Discuss the effect on net income of restatement to expense all interest. ii. 111, iv. c. Discuss the effect of restatement on the five-year trend of Chevron's: i. Interest expense. ii. Interest coverage ratio. iii. Pretax income and net income. d. State which calculation of the interest coverage ratio is better for financial analysis and justify your choice. Chapter 8 Homework 8-1 The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in Smillions): 20x5 20x6 20x7 20x8 20x9 Interest ex Pretax income.. 1,789 4,740 5,502 1,834 3,648 Net income Capitalized interes.... Amortization of capitalized interest... Using the reported interest expense, compute the interest coverage ratio for each year 20x5 to 20x9. The amortization of capitalized interest refers to the additional depreciation expense resulting from having a higher asset cost. Assuming that Chevron had always expensed interest as incurred: 1 .. 930 2,607 3,256 1,339 2,070 59 141 47 108 24 82 28 39 35 a. b. i. Recompute the interest coverage ratio for each year. Even though the revised EBIT would be slightly higher due to the amortization of capitalized interest, you may assume for this problem it is unchanged. Compare the two ratios (based on the reported versus restated data). Recompute income (assume a 35% marginal tax rate for interest each year; you'll note this is different from the implied effective average rate from the above pretax income and net income numbers) Discuss the effect on net income of restatement to expense all interest. ii. 111, iv. c. Discuss the effect of restatement on the five-year trend of Chevron's: i. Interest expense. ii. Interest coverage ratio. iii. Pretax income and net income. d. State which calculation of the interest coverage ratio is better for financial analysis and justify your choice