Question

Lever Age pays a(n) 9% rate of interest on $9.1 million of outstanding debt with a face value of $9.1 million. The firm’s EBIT was $2.9 million.

a.	What are times interest earned? (Round your answer to 2 decimal places.)

Times interest earned

b.	If depreciation is $110,000, what is cash coverage? (Round your answer to 2 decimal places.)

Cash coverage

c.	If the firm must retire $210,000 of debt for the sinking fund each year, what is its “fixed-payment cash-coverage ratio” (the ratio of cash flow to interest plus other fixed debt payments)? (Round your answer to 2 decimal places.)

Fixed-payment cash-coverage ratio

Answer 1

- Interest expenses =Debt Oustanding*Interest rate

= $9.1 million*9% = $0.819 million

a). Times Interest earned = EBIT/Interest expenses = $2.9 million/$0.819 million

Times Interest earned = 3.54 times

b). Cash Coverage = (EBIT + Depreciation)/Interest expenses = ($2,900,000 + $110,000)/$819,000

Cash Coverage = 3.68 times

c). Fixed-payment cash-coverage ratio = (EBIT + Depreciation)/(Interest expenses + Fixed debt payment)

Fixed-payment cash-coverage ratio = ($2,900,000 + $110,000)/($819,000 + $210,000)

= $3010,000/$1029,000

Fixed-payment cash-coverage ratio = 2.93 times

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