Running Head: FINANCIAL ANALYSIS 1

Financial Analysis

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FINANCIAL ANALYSIS 2

Financial Analysis

Question 1

The times-interest-earned ratio is a profitability ratio and a debt ratio used to determine

how an organization can pay its outstanding debt. It is sometimes called the interest coverage

ratio. It is calculated by dividing an organization’s revenue before taxes and interest during a

specific time by interest payments that are due the same period. It is the formula that is use by

creditors to determine an organizations riskiness relative to future borrowing and current debt.

(Welch, 2017). The times-interest-earned ratio is used to measure the rimes an organization can

cover its outstanding interest payment with its available incomes. Therefore, the ratio measures

the safety an organization has for paying interests on its outstanding debt.

Considering the formula used to calculate an organization’s times-interest-earned ratio, a

decline in the interest payment shall result in the increase in the time-interest-earned-ratio

keeping all factors constant. This is a good indicator that the firm has a great capacity to cover

the interest payments. A higher times-interest-ratio indicates that there is more income available

to meet the interest obligations since the incomes are significantly greater than the company’s

annual interest debt.

Question 2

The market value of an organizations’ debt is the market price of the dept if traded. In

some setting it is the present value of the future cash flows. According to Ross, Westerfield, and

Jaffe (2020), the discount rate used is a risk-free and an appropriate share of risk of the specific

organization. The debt-to-equity ratio is used to compare an organization’s total liabilities to its

shareholders equity. It is used to calculate how much leverage an organization is using.

FINANCIAL ANALYSIS 3

In incidences of a decrease in the interest rates, the fixed-rate debt market value

increases. That is, decreasing interest rates increases the debt market value, thus increasing an

organization’s liabilities significantly. Organizations with higher liabilities has less favorable

debt-to-equity ratio.

Question 3

A higher times-interest-earned-ration suggests that the organization has objectionable

low-level leverage. It can also be said the company is using earning to pay down debt too much

debt, without considering to invest on vast opportunities that increase the rate of return. Low

leverage ratios are desirable to investors and lenders because of the protection of the lenders

interest on the event of a company’s decline. Shareholders are also probable to get their initial

investments back in the occurrence of a liquidation (Berk and DeMarzo, 2020). Therefore, low

leverage ratios imply an organization with lower risk to shareholders.

FINANCIAL ANALYSIS 4

References

Berk, J. B., & DeMarzo, P. M. (2020). Corporate finance. New York, NY: Pearson.

Ross, S. A., Westerfield, R., & Jaffe, J. F. (2020). Corporate finance: core principles and

applications. New York: McGraw-Hill Education.

Welch, I. (2017). Corporate finance. California: Ivo Welch.

Northington, S. (2011). Finance. New York, NY: Fergusons.