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Information for two companies in the same industry, Ria Corporation and Les Corporation, is presented here:
| Ria Corporation | Les Corporation | |
| Cash provided by operating activities | $200,000 | $200,000 |
| Average current liabilities | 50,000 | 100,000 |
| Average total liabilities | 200,000 | 250,000 |
| Capital expenditures | 20,000 | 35,000 |
| Dividends paid | 14,000 | 18,000 |
a) Calculate the current debt coverage ratio, cash total debt coverage ratio, and free cash flow for each company
b) Compare the liquidity and solvency of the two companies
Expert Answer
| Answer a. | ||||
| Ria Corporation | Les Corporation | |||
| Cash provided by operating activities (A) | 200,000 | 200,000 | ||
| Average Current Liabilities (B) | 50,000 | 100,000 | ||
| Current Debt Coverage Ratio (C = A/B) | 4 Times | 2 Times | ||
| Average Total Liabilities (D) | 200,000 | 250,000 | ||
| Cash total debt coverage ratio (E = A / D) | 1 Times | 0.80 Times | ||
| Capital Expenditures (F) | 20,000 | 35,000 | ||
| Dividends Paid (G) | 14,000 | 18,000 | ||
| Free Cash Flow (H = A – (F + G)) | 166,000 | 147,000 | ||
| Current Debt Coverage Ratio = Net Cash Provided by Opearting Activities / Average Current Liabilities | ||||
| Cash total debt coverage ratio = Net Cash Provided by Opearting Activities / Average Liabilities | ||||
| Free cash Flow = Net Cash Provided by Opearting Activities – Capital Expenditures – Dividends Paid | ||||
| Answer b. | ||||
| Ria Corporation’s liquidity and solvency ratios are higher (better) than Les Corporation’s comparable ratios. In particular, Ria’s current cash debt coverage ratio is twice as high as Les’s. This ratio indicates that Ria is substantially more liquid than Les. Ria’s solvency, as measured by the cash debt coverage ratio and free cash flow, is also better than Les’s. | ||||
