The following data were obtained from recent annual reports of Chevron, a multinational oil company (all...

 

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The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in $millions): Interest expense... Pretax income ......................... Net income. ********** Capitalized interest... 82 Amortization of capitalized interest... 24 28 a. 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. ii. iii. 20x9 $ 401 20x5 20x6 20x7 20x8 $364 $312 $405 4,740 5,502 1,834 3,648 $472 1,789 930 2,607 3,256 1,339 2,070 141 108 47 **** 39 35 59 b. Assuming that Chevron had always expensed interest as incurred: 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. 9 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). c. Discuss the effect of restatement on the five-year trend of Chevron's: iv. Discuss the effect on net income of restatement to expense all interest. 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. The following data were obtained from recent annual reports of Chevron, a multinational oil company (all data in $millions): Interest expense... Pretax income ......................... Net income. ********** Capitalized interest... 82 Amortization of capitalized interest... 24 28 a. 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. ii. iii. 20x9 $ 401 20x5 20x6 20x7 20x8 $364 $312 $405 4,740 5,502 1,834 3,648 $472 1,789 930 2,607 3,256 1,339 2,070 141 108 47 **** 39 35 59 b. Assuming that Chevron had always expensed interest as incurred: 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. 9 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). c. Discuss the effect of restatement on the five-year trend of Chevron's: iv. Discuss the effect on net income of restatement to expense all interest. 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.

Answer rating: 100% (QA)

ANSWER a The interest coverage ratio is calculated as EBIT earnings before interest and taxes divided by interest expense Interest Coverage Ratio 20x5 ... View the full answer