The Great Recession of 2007-09 severely depressed world trade, the demand for tanker services, and the daily rental rate for tankers. Herbjorn Hansson, CEO of Nordic American Tanker Shipping, remarked, “Those who have a lot of debt are suffering ... If you're collecting $10,000 a day and you have a cash break-even of $25,000 a day, that's a $15,000 a day loss." By contrast, Mr Hannson felt that his company was well placed to survive the downturn as it carried no debt. Its ships could make a profit with rates of $10,000 a day. (Source: “Oil tanker owners see rates fall”, Financial Times, May 5, 2009.)

Please answer the following questions:

1. Suppose that the operating costs of a tanker are $8,000 a day, and, for a debt-financed tanker, the interest cost is $17,000 a day. Given revenues of $10,000 a day, construct a conventional income statement.

2. Suppose that the operating cost of a laid-up tanker is $1,500 a day. Construct an income statement showing two alternative courses of action: continue operations and lay up the vessel. Should the tanker owner lay up the ship?

3. In discussing the situation of tanker owners financed by debt, what mistake did Mr Hannson make?

Answer rating: 100% (QA)

1 Conventional income statement Per day Revenues 10000 Less Operating cost 8000 Opera... View the full answer