After proper adjustments for sale of receivables with recourse, why does the EBIT/Interest Expense ratio decrease? I understand that int expense increases due to the A.R being sold at a discount, but what happens to EBIT?
edit: i think i’m wrong, p. 536-538 in FSA, maybe someone else can answer this better
if you sold $10 of recievables with recourse for 8, then 8 would be added to asset and the 2$ would be charged to debt as interest. Hence, because interest expenses increase, interest coverage ratio decrease, I think there is not effect onf EBIT since it is the Earning before Interest and taxes
I am not sure strangedays if that is correct. The seller of AR services in full. But As I understand it is collateralized borrwing so you have to pay some interest, so that will increase the numerator. I think EBIT remain constant.
strangedays Wrote: ------------------------------------------------------- > if you sold $10 of recievables with recourse for > 8, then 8 would be added to asset and the 2$ > would be charged to debt as interest. > Hence, because interest expenses increase, > interest coverage ratio decrease, I think there is > not effect onf EBIT since it is the Earning > before Interest and taxes EBIT should increase $2 as well. Net effect is interest coverage decrease.
hopetobeat, can you explain why EBIT increases $2 as well? thanks
saurya_s Wrote: ------------------------------------------------------- > I am not sure strangedays if that is correct. The > seller of AR services in full. But As I understand > it is collateralized borrwing so you have to pay > some interest, so that will increase the > numerator. I think EBIT remain constant. I think here we are talking about “receivables with recourse”
strangedays Wrote: ------------------------------------------------------- > saurya_s Wrote: > -------------------------------------------------- > ----- > > I am not sure strangedays if that is correct. > The > > seller of AR services in full. But As I > understand > > it is collateralized borrwing so you have to > pay > > some interest, so that will increase the > > numerator. I think EBIT remain constant. > > > I think here we are talking about “receivables > with recourse”. In this case, it is treated as an “off-balance sheet item”
right, when there is no recourse, it is called factoring and no adjustments need be made. If it is with recourse, then the adjustments need to be made to assets and liab, and thus interest expense and EBIT. So my question is what happens to EBIT?
EBIT will not change