Question in Non-Current Liabilities (reading 31)

CFA Level I FRA
#1

Hi

I am new to the forum and wonder if someone can help me with the following question:

Here is a question when I use Kaplan Schweser when revising Non-Current Liabilities (reading 31). On page 296 of the SchweserNotes an examples shows how to calculate and analyse the leverage ratio and coverage ratio. The calculated leverage ratio is showing a decreasing trend over the 3 years and as well as the coverage ratio. It says one explanation for this is that interest rates are increasing.

I do get that an increasing interest rate will result in a higher interest expense thus a lower coverage ratio. Can anyone help me understand why an increasing interest rate increases shareholder’s equity as well?

Many thanks

LA

#2

:grin:

#3

It doesn’t is the short answer. Increasing interest rates will increase leverage ratio by decreasing your equity and / or increasing debt (if all things were held constant).

The only exception might be because cost of debt is increasing / the company is overleverage, the company decided to do an equity raise, thereby increasing equity to bring its leverage ratio to a healthy level.

More likely explanation is Schweser made a mistake.