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Mike Smith, CFA, an analyst with Blue River Investments, is considering buying a Montrose Cable Company corporate bond. He has collected the balance sheet and income statement information for Montrose as shown in Table 1 below.

Table 1 Montrose Cable Company Year Ended March 31, 2017 (USD Thousands)
Balance Sheet
Current assets	$4,760
Fixed assets	43,240
Total assets	$48,000
Current liabilities	4,420
Long-term debt	10,000
Total liabilities	$14,420
Shareholders' equity	33,580
Total liabilities and shareholders' equity	$48,000
Income Statement
Revenue	$18,520
Operating and administrative expenses	14,040
Operating income	$4,480
Depreciation and amortization	1,665
Interest expense	942
Income before income taxes	$1,873
Taxes	682
Net income	$1,191

He has also calculated the three ratios shown in Table 2 below, which indicate that the bond is currently rated "A" according to the firm's internal bond-rating criteria.

Table 2 Selected Ratios and Credit Yield Premium Data for Montrose
EBITDA/interest expense	4.76
Long-term debt/equity	0.30
Current assets/current liabilities	1.08
Credit yield premium over U.S. Treasuries	53	basis points

Smith has decided to consider some off-balance-sheet items in his credit analysis, as shown in Table 3.

Table 3 Montrose Off-Balance-Sheet Items

• Montrose has guaranteed the long-term debt (principal only) of an unconsolidated affiliate. This obligation has a present value of $970,000.
• Montrose has sold $505,000 of accounts receivable with recourse at a yield of 8 percent.
• Montrose is a lessee in a new noncancelable operating leasing agreement to finance transmission equipment. The discounted present value of the lease payments is $6,136,000 using an interest rate of 10 percent. The annual payment will be $1,000,000.

Specifically, Smith wishes to evaluate the impact of each of the off-balance-sheet items on each of the ratios found in Table 2. Assume that the "loan proceeds" from the financed receivables would be invested at interest rate of 8 percent.

1. Calculate the combined effect of the three off-balance-sheet items in Table 3 on each of the following three financial ratios shown in Table 2. Do not round intermediate calculations. Round your answers to four decimal places.

   1. EBITDA/interest expense: ________
   2. Long-term debt/equity: ___________
   3. Current assets/current liabilities: __________

2. Evaluate whether or not the credit yield premium incorporates the effect of the off-balance-sheet items, state and justify whether or not the current credit yield premium compensates Smith for the credit risk of the bond, based on the internal bond-rating criteria found in the firm's internal bond-rating criteria. Round your answers to the nearest whole number.

   		Credit Yield Premium
   		over U.S. Treasuries
   	Bond Rating	(in basis points)
   Interest Coverage	-Select- (A / AA / BB / BBB) Item 4
   Leverage	-Select-(A / AA / BB / BBB) Item 6
   Current Ratio	-Select- (A / AA / BB / BBB) Item 8

   The current rating of the Montrose bond as an "A" -Select- (does not incorporate / incorporate) Item 10 the effect of the off-balance-sheet items, and the current credit yield premium of 53 basis points -Select- (is / is not) Item 11 sufficient to compensate Smith for the credit risk of the bond.