Harold Adams, a financial analyst, is reviewing the financial data for Butler, Inc., for the years 2000, 2001 and projected for 2002. Information for several selected ratios are provided in Table 1 below:
|
Table 1
Selected Data on Butler, Inc. |
|
Ratios |
2002
(Projected) |
2001 |
2000 |
|
Earnings before interest and taxes (EBIT) Interest Coverage Ratio |
19.5 |
17.2 |
13.7 |
|
Earnings before interest, taxes, depreciation & amortization (EBITDA) Interest Coverage |
10.0 |
9.0 |
8.0 |
|
Funds from Operations: Total debt (TD) |
48.0 |
48.0 |
55.0 |
|
Free Operating Cash Flow: TD |
NA |
NA |
NA |
|
Pretax Return on Capital |
26.0 |
24.1 |
18.5 |
|
Operating Income: Sales |
36.0 |
36.5 |
37.8 |
|
Long-term debt (LTD): Capitalization |
29.0 |
28.9 |
31.8 |
|
TD: Capitalization |
45.0 |
58.0 |
60.2 |
Adams also obtained Standard and Poor's information in Table 2 below which includes median ratios for various credit ratings.
|
Table 2
Standard & Poor's Select Median Rating Criteria |
|
Ratios |
AAA |
AA |
A |
BBB |
BB |
B |
|
EBIT Interest Coverage Ratio |
12.9 |
9.2 |
7.2 |
4.1 |
2.5 |
1.2 |
|
EBITDA Interest coverage |
18.7 |
14.0 |
10.0 |
6.3 |
3.9 |
2.3 |
|
Funds from Operations: TD |
89.7 |
67.0 |
49.5 |
32.3 |
20.1 |
10.5 |
|
Free Operating Cash Flow: TD |
40.5 |
21.6 |
17.4 |
6.3 |
1.0 |
(4.0) |
|
Pretax Return on Capital |
30.6 |
25.1 |
19.6 |
15.4 |
12.6 |
9.2 |
|
Operating Income: Sales |
30.9 |
25.2 |
17.9 |
15.8 |
14.4 |
11.2 |
|
LTD: Capitalization |
21.4 |
29.3 |
33.3 |
40.8 |
55.3 |
68.8 |
|
TD: Capitalization |
31.8 |
37.0 |
39.2 |
46.4 |
58.5 |
71.4 |
As shown, Butler ’s projected debt to capitalization ratios indicate that its total LTD and TD are expected to decline. What is the most likely implication of this trend?
A. Butler's ability to repay will decline.
B. These ratios have no impact on a firm's credit rating.
C. The firm's repayment ability is expected to increase.
|
