Question

Lever Age pays a 9% rate of interest on $10.40 million of outstanding debt with face value $10.4 million. The firm’s EBIT was $1.4 million.

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

b. If depreciation is $240,000, what is its cash coverage ratio? (Round your answer to 2 decimal places.)

Answer 1

Interest = 9% * $10400000 = $936000

(a) Formula for times interest earned ratio is:

Times interest earned ratio = EBIT / Interest expense

Putting the given values in the above formula, we get,

Times interest earned ratio = $1400000 / $936000 = 1.5

(b) Formula for cash coverage ratio is:

Cash coverage ratio = Cash / Interest

Here, cash available is :

Cash = EBIT + Depreciation

Cash = $1400000 + $240000 = $1640000

Putting the values in the cash coverage ratio formula, we get,

Cash coverage ratio = $1640000 / $936000 = 1.75