Boehm Gau Real Estate Speculators, Inc., and the Northern California Electric Utility Company have the following EBIT and debt servicing burden:
|
|
NORTHERN |
|
|
BOEHM GAU |
CALIFORNIA |
|
|
Expected EBIT |
$5,000,000 |
$100,000,000 |
|
Annual interest |
1,600,000 |
45,000,000 |
|
Annual principal payments on debt |
2,000,000 |
35,000,000 |
The tax rate for Boehm Gau is 40 percent, and for Northern California Electric Utility is 36 percent. Compute the interest coverage and the debt service coverage ratios for the two companies. With which company would you feel more comfortable if you were a lender? Why?