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S&P 500 firms in Charts V and VI, respectively.22

4.4Fixed Charge Coverage After Taxes

Fixed charge coverage after taxes is a measure of a firm’s ability to pay its interest expense (to bondholders and other creditors) out of its net income.  This is measured as the ratio of quarterly net income (before extraordinary items) divided by interest expense, from which unity is subtracted.  Therefore, the ratio measures how many times the interest expense is "covered" by the radio company's net income, which provides a sense of the radio company's ability to manage its debt load.  As Chart VIII shows, while not generating the same level of net income to interest expense as other companies, the publicly-traded radio companies appear to be generating enough cash flow to meet their interest obligations.

4.5Market to Book Ratio

Other aspects of a company’s ability to finance its operations are its prospects for future growth and profitability.  The market to book ratio is defined as the ratio of a firm’s market value of equity to its book value of equity, which is the accounting value that remains out of a firm's assets after paying off all of the firm's creditors.  The market to book ratio is a useful measure of the market’s assessment of that firm’s future prospects.  The greater a firm’s market to book ratio, the higher the market is assessing that firm’s future prospects.  

Further, the market to book ratio is a good proxy for a firm’s "q" ratio.23  The q ratio is defined as the ratio of the market value of the firm's assets to the replacement cost of these

22 Recent research suggests that firms with a higher percentage of debt tend to charge higher prices and compete less vigorously than firms with a lower percentage of debt.  See Judith A. Chevalier, “Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry,” American Economic Review 85: 415-435; Judith A. Chevalier, “Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing,” Journal of Finance 50: 1095-1110.  Further, research also suggests that an industry’s general level of leverage is an indicator of its greater concentration and potentially less vigorous competition.  See, for example, Gordon M. Phillips, “Increased Debt and Industry Product Markets: An Empirical Analysis,” Journal of Financial Economics 37: 189-238.  See also the “q-ratio” analysis of assessing competition in video programming distribution markets in Implementation of Section 19 of the 1992 Cable Act (Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming), CS Docket No. 94-48, First Report, Appendix H, 9 FCC Rcd 7442 (1994).

23 N. Varaiya, R. Kerin, and D. Weeks, “The Relationship Between Growth, Profitability, and Firm Value,” Strategic Management Journal 8: 487-497.


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