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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

A company reports cash flow from operations of USD 900 million, interest paid of USD 100 million and income taxes paid of USD 200 million, with CFO shown after interest and taxes. Cash paid for long-term debt repayments over the year is USD 250 million. Its debt coverage ratio would be calculated using total debt of USD 3,000 million. Which statement about the company's cash flow to total debt is most accurate?

The debt coverage ratio is 30.0%, found by dividing operating cash flow of 900 by total debt of 3,000. Interest, taxes and debt repayments are not adjusted, because CFO is already stated after interest and taxes and repayments are financing flows.

  1. AIt is 30.0%, because CFO is divided by total debtCorrect
  2. BIt is 33.3%, because interest and taxes are added back to CFO
  3. CIt is 36.7%, because debt repayments are added to CFO

Explanation

Debt coverage = CFO / total debt = 900 / 3,000 = 30.0%. Adding back interest and taxes (1,200/3,000 = 40%) or other adjustments is not part of the standard ratio; CFO is already after those payments. Debt repayments are financing flows and are not added.

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