Question

Pop evil, inc.'s net income for the most recent year was $16,802. The tax rate was 21 percent. The firm paid $3,706 in total interest expense and deducted $4,491 in depreciation expense. What was the cash coverage ratio for the year?

Answer 1

In order to find Cash coverage ratio, Earnings before Interest and Tax will be required to be found. Thus We shall calculate Income Before tax First. The below logic needs to be Understood:

If Income before tax is 100, Income after tax will be 100-21=79, Thus if Net Income is 79, Earnings before tax will be calculated as below:

Earnings before tax=16802*$\frac{100}{79}$

Earnings before tax=$21268

EBIT= Earnings Before Tax+Interest Expense

EBIT=21268+3706

EBIT=$24974

Cash Coverage Ratio=$\frac{EBIT+Depreciation}{Interest Expense}$

Cash Coverage Ratio=$\frac{24974+4491}{3706}$

Cash Coverage Ratio=7.95