-34,660 Net Income before discontinued operations Cumulative Effect of a change
ID: 2451303 • Letter: #
Question
-34,660
Net Income before discontinued operations
Cumulative Effect of a change in accounting principle
Net Income before discontinued operations
Cumulative Effect of a change in accounting principle
The question is: What is a sustainable level of debt ? and what course of action you recommend?
Six Flags Income Statement 2007 2006 2005 2004 2003 Revenue 972,780 945,665 956,757 879,586 883,089 Operating Expenses 757,617 736,248 666,832 613,648 592,555 Depreciation & Amortization 138,787 132,295 127,658 125,374 119,715 Loss on Fixed Assets 43,062 27,057 13,906 11,676 -301 Income from Operations 33,314 50,065 148,361 128,888 171,120 Other Expenses Interest Expense 199,022 199,991 183,547 191,563 213,565 Minority Interest in Earnings 39,684 40,223 39,794 37,686 35,997 Other Expenses 12,367 948 19,303 37,731 27,592 Net loss on debt extinguishment 20,122 11,560 10,877 14,356 626 Taxable Income -237,881 -202,657 -105,160 -152,448 -106,660 Income Tax Expense 6,203 4,318 3,705 24,442-34,660
Net Income before discontinued operations
-244,084 -206,975 -108,865 -176,890 -72,000 Discontinued Operations -9,075 -97,605 -2,073 -287,919 10,287Cumulative Effect of a change in accounting principle
-1,038 Net Income -253,159 -304,580 -111,976 -464,809 -61,713 Six Flags Income Statement 2007 2006 2005 2004 2003 Revenue 972,780 945,665 956,757 879,586 883,089 Operating Expenses 757,617 736,248 666,832 613,648 592,555 Depreciation & Amortization 138,787 132,295 127,658 125,374 119,715 Loss on Fixed Assets 43,062 27,057 13,906 11,676 -301 Income from Operations 33,314 50,065 148,361 128,888 171,120 Other Expenses Interest Expense 199,022 199,991 183,547 191,563 213,565 Minority Interest in Earnings 39,684 40,223 39,794 37,686 35,997 Other Expenses 12,367 948 19,303 37,731 27,592 Net loss on debt extinguishment 20,122 11,560 10,877 14,356 626 Taxable Income -237,881 -202,657 -105,160 -152,448 -106,660 Income Tax Expense 6,203 4,318 3,705 24,442 -34,660Net Income before discontinued operations
-244,084 -206,975 -108,865 -176,890 -72,000 Discontinued Operations -9,075 -97,605 -2,073 -287,919 10,287Cumulative Effect of a change in accounting principle
-1,038 Net Income -253,159 -304,580 -111,976 -464,809 -61,713Explanation / Answer
Here is the answer
an assessment of sustainability requires an assessment of whether the debt burden is sustainable. One way to do that would be to look at the discounted value of the debt , i.e. the discounted value of the expected debt servicing cash flows (both - 13 - coupons and amortization of principal). The issue is then which discount factor to use to price those cash flows. If one uses current market rates/spreads, one obtains the current value of the debt. But if the country is likely to be insolvent and default, the use of such market rates would give the current low value of the debt. In some sense, this is, if the market correctly prices the risk of default, the correct market assessment of the value of the debt of the country and thus a measure of the amount of debt reduction necessary to achieve debt sustainability. But one cannot rule out mispricing due to situations of panic where the spreads spike beyond what is warranted by fundamentals or situations in which the debtors may try to talk down the market value of the debt to achieve a better deal in the debt restructuring process. But, at a first approximation, if the market value of the debt is very different from the value of the prospective cash flows payments discounted by a risk-neutral discount rate, a debt reduction may be warranted.
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