Question

Which ratio(s) measure the firm’s ability to meet its interest costs?

Which ratio(s) measure the firm’s ability to meet its interest costs?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1


Interest coverage ratio measures the firm’s ability to meet the interest expenses in times.

Formula for interest coverage ratio:

Interest coverage ratio = Earnings Before Interest and Tax (EBIT) / Interest Expense

Higher the ratio better the ability of firm to pay its interest costs.

The earning before interest and tax or EBIT, is taken in numerator for formula because interest is paid before income taxe and if a firm has high EBIT then it can pay more interest towards its borrowing or we can say firm can take more borrowings for which it has sufficient EBIT.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to...
The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends. Question 10 options: True False
Which ratio measures the firm’s ability to pay current interest and lease payments? Multiple Choice Total...
Which ratio measures the firm’s ability to pay current interest and lease payments? Multiple Choice Total Assets turnover ratio Time interest earned ratio Debt ratio Cash-flow-to-debt ratio Current ratio
The Interest Coverage (or Times Interest Earned) Ratio This ratio indicates a business' ability to pay...
The Interest Coverage (or Times Interest Earned) Ratio This ratio indicates a business' ability to pay the interest on its debt. It is calculated: EBIT / Interest Expense which is easy to remember if you remember those two accounts on the income statement. EBIT is usually the line immediately before interest expense. The Preferred Dividend Coverage Ratio Like the Interest Coverage Ratio, this ratio indicates a business' ability to pay dividends to its preferred shareholders. It is calculated: Net Income...
The ability of a company to collect receivables is measured by which ratio?      A. Day's sales...
The ability of a company to collect receivables is measured by which ratio?      A. Day's sales in receivables      B. Inventory turnover ratio C. Current ratio       D. Acid-test ratio The ability of a company to sell inventory is measured by which of the following ratios?      A. Inventory turnover ratio      B. Current ratio C. Day's sales in receivables      D. Acid-test ratio A company's ability to pay liabilities with current assets is measured by which of the following ratios?      A. Inventory turnover ratio     ...
2.You are analyzing the financial condition of a company to assess its ability to meet upcoming...
2.You are analyzing the financial condition of a company to assess its ability to meet upcoming loan payments. You calculate its current ratio as 1.2. You also find that a major portion of accounts receivable is due from one client who has not made any payments in the past 12 months. Remov- ing this receivable from current assets lowers the current ratio to 0.7. What do you conclude?
6. A firm’s times interest earned ratio is 3 but its cash flow to long-term debt...
6. A firm’s times interest earned ratio is 3 but its cash flow to long-term debt ratio is only 0.75. Taken together, does this information mean that a long-term lender should be concerned about lending this firm money long term?
19. ___________ is a firm’s ability to generate products or services that are perceived by its...
19. ___________ is a firm’s ability to generate products or services that are perceived by its customers as being superior and unique as opposed to those offered by its competitors. A. Strategy B. Product differentiation C. The balanced scorecard D. None of the above
1) What is the measure of indebtedness? Quick ratio Current ratio Times interest earned Debt ratio...
1) What is the measure of indebtedness? Quick ratio Current ratio Times interest earned Debt ratio 2) Do you want this measure higher or lower? Higher Lower
Which of the following is true with respect to NET WORKING CAPITAL? A. If a firm’s...
Which of the following is true with respect to NET WORKING CAPITAL? A. If a firm’s current ratio is 1, then its net working capital is 1. B. If a firm’s current ratio is less than 1, it will have positive working capital. C. If a firm’s current ratio is greater than 1, it will have negative working capital. D. a, b, and c are all true E. a, b and c are all not true (false) Which ratio best...
37. Which of the following ratio is useful in assessing the liquidity (i.e., the ability of...
37. Which of the following ratio is useful in assessing the liquidity (i.e., the ability of a company to pay its current liabilities using current assets) of a company? Select one: a. debt ratio b. current ratio c. inventory turnover rate d. gross margin ratio
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT