Question

Delectable Parsnip, Inc.’s, net income for the most recent year was $9,929. The tax rate was 24 percent. The firm paid $4,716 in total interest expense and deducted $5,181 in depreciation expense. What was the company’s cash coverage ratio for the year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

= 4.88 (Approximately)

Explanation:

The question is to determine the company's cash coverage ratio for the year

To calculate:

1. Calculate the Earnings Before Interest and Tax

= Earnings After tax x (1-tax)= Net income

Earning before tax = Net income/ (1-tax)

Earning before tax = = $9,929 / (1-0.24)

=$9,929 / 0.76

=13, 064.47368421

Earnings Before Interest and Tax

= 13, 064.47368421 + 4,716

= 17,780.47368421

2. Calculate the Cash Coverage ratio

Cash Coverage ratio = (Earning Before Interest and Tax  + Depreciation)/ Interest

= 17,780.47368421+ $5181)/$4,716

= 22,961.47368421/4716

= 4.8688451

= 4.88 (Approximately)

The cash coverage ratio represents a measure of company's ability to meet its current obligations through cash and cash equivalents only.