Selected balance sheet and income statments information from Verizon Communicati

Question

Selected balance sheet and income statments information from Verizon Communications Inc. Follows:

($ Millions)                                                     2013                  2012
Current Assets                                           $70,994             $21,235
Current Liabilities                                         27,050               28,956
Total Liabilities                                            178,682             139,689
Equity                                                          95,416               85,533
Earnings Before Interest & Taxes                31,944               12,468
Interest Expense                                             2,667                 2,571  
Net Cash Flow From Operating Activities     38,818               31,486   

A) Compute the current ratio for each year and discuss any trent in liquidity. What additional information about the numbers used to compute this ratio might be useful in helping you assess liquidity? Explain.

B) Compute times interest earned, total liabilities-to-equity, and cash from operations to total debt ration for each year and discuss any trends for each. Hint: Verizon's total debt was $93,591 and $52,257 for 203 and 2012 respectively. Do you have any concerns about the extent of Verizon's financial leverage and the company's ability to meet interest obligations? Explain.

C) Verizon's capital expenditures are expected to increase substaintially as it seeks to respond to competitive pressures to upgrade the quality of its ocmmunications infrastructure. Assess Verizon's liquidity and solvency in light of this strategic direction.

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Explanation / Answer

A) Computation of Current Ratio for the following year.We have,

Note: Current Ratio = Current Assets/ Current Liabilities.

Current Ratio is a measure of margin of safety to the Creditor. If the firm has higher Current ratio,it has better liquidity. In this question,Verizon Communications Inc. has low liquidity (i.e. 0.73 times) in 2012.But, it improves in 2013 due to higher Current ratio ( 2.62 times).

Generally, Current ratio is 2:1 (Current Asset twice Current Liabilites) is satisfactory for assessing liquidity.It means for every one $ of current liabilities, Current assets of $ two are available to meet them.

B) Computation of Times interest earned, Total liabilities to Equity and Cash form operations to total Debt ration.We have,

(1) Times interest earned = Earnings Before Interest & Taxes /Interest paid

For 2012,

= 12,468/2,571 = 4.85 times.

For 2013,

= 31,944/2,667 = 11.98 times.

Conclusions: Higher the times interest earned, more stable situation for the firm in respect to payment interest to the lenders.In this situation, Firm is going to stable in 2013(11.85 times) as comparision from 2012(4.85 times)

(2) Total liabilities to equity ratio = Total Liabilities / Equity

For 2012,

= 1,39,689/85,533 =1.63 times.

For 2013,

= 1,78,682/95,416 = 1.87 times

Conclusion: It is the ratio of the amount invested by outsiders to the amount invested by te owners of business.Higher this ratio show, more ability to meet outsider claim. Here, this ratio is improving in 2013(1.87 times) from 2012(1.63 times).

(3) Cash form operations to total Debt ratio = Operating Cash Flow/ Total Debt.

   For 2012,

   = 31,486/ 52,257 = 0.60 times

   For 2013,

   = 38,818/93,591 = 0.41 times.

Conclusion: The overall ability of a firm to service outside liabilities is truly reflected in the total cash flow to total debt ratio. Higher this ratio, the better is the ability. In this question, ratio is decresing in 2013 as compared to 2012.

Financialleaverage occured in the firm due to use of fixed interest fund. If fixed interest long term fund is higher,then, earning per equity shareholder is decreases. Since, times interest earned ratio for both years is faverable.Therefore,it is good in point of view financial leaverage.

(3) Company have current ratio is 2.62 times.So, its liquidity ( short-term obligations) is favorable.But, its Cash flow from operation to total debt is little bit lower.So, its solvency (long-term obligations) is partilly favorable.

Company should make capital expenditure by mix of short-term loans and long-term loans.So, its financial structrue is not affected.

Particulars Calculation Year 2013 Year 2012 Current Assets $ 70,994 $ 21,235 Current Liabilites $ 27,050 $ 28,956 Current Ratio 70,994/27,050 2.62 - Current Ratio 21,235/28,956 - 0.73

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