Question

1. Consider a company with a cash coverage ratio of 4.2 and the following information: Sales of $25.6 million, Cost of goods sold of $14 million, Depreciation of 7.7 million.
   1. What is the company’s interest expense?
   2. What is its times interest earned ratio?
   3. If the tax rate is 21% what is its net income?

Answer 1

a)
EBIT = Sales - cost of goods sold - depreciation
= $25.6 million - $14 million - $7.7 million
= $3.9 million

Cash coverage ratio = (EBIT + depreciation) / Interest expense
4.2 = ($3.9 million + 7.7 million) / Interest expense
4.2 = $11.6 million / Interest expense
Interest expense = $11.6 million / 4.2 = $2.76 million

Interest expense = $2.76 million

b)
Times interest earned ratio = EBIT / Interest expense
= $3.9 million / $2.76
= 1.41

Times interest earned ratio = 1.41

c)
EBT = EBIT - Interest expense = $3.9 million - $2.76 million = $1.14 million

Net income = EBT * (1 - tax rate)
= $1.14 million * (1 - 0.21)
= $0.90 million

Net income = $0.90 million